US Dollar Reverses Losses and Heads North after White House Hits EU, Canada and Mexico with Tariffs

-USD rises amid fresh "trade war" fears as White House unveils tariffs.

-Exports from European Union, Canada and Mexico now face levies. 

-Tariffs follow car industry action and come amid China trade conflict.

© Shealah Craighead, The White House

The US Dollar reversed earlier losses Thursday and headed north after President Donald Trump said the US will levy tariffs on US imports of steel and aluminium from the European Union, Canada and Mexico, raising the specter of a so called trade war that embroils not only the US and China, but Europe as well. 

The tariffs will go into force at midnight Thursday after the White House decided not to renew an earlier exemption that was due to expire on June 01. At the same time, previously exempt Australia, Brazil and Argentina have won a permanent exemption after agreeing measures with the White House that are designed to reduce their metals exports to the US.  

Comments by US Commerce Secretary Wilbur Ross, made in an interview with French newspaper Le Figaro, had suggested the announcement was likely to come at some time on Thursday.

“We don't want a trade war. It’s up to the European Union to decide if it wants to take retaliatory measures. The next question would be: how will the Trump react? You saw his reaction when China decided to retaliate. If there is an escalation it will be because the EU would have decided to retaliate,” Ross said.

European Union officials have previously said they will retaliate with countermeasures if targeted by US trade tariffs, which suggests the final session of the week could see currency markets in the renewed grip of fears of a so called trade war.

"While striving to avoid today's situation, the EU has been preparing over the last months and stands now ready to react to the US trade restrictions on steel and aluminium in a swift, firm, proportionate and fully WTO-compatible manner," the European Union said in a statement Thursday.

The decision on steel and aluminium tariffs comes just days after the White House said it will push ahead with proposed tariffs on $50 billion worth of industrial goods imports from China around the middle of June.

"Under Section 301 of the Trade Act of 1974, the United States will impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology, including those related to the “Made in China 2025” program. The final list of covered imports will be announced by June 15, 2018, and tariffs will be imposed on those imports shortly thereafter," the White House said in a statement this week.

The decision to go ahead with the Chinese tariffs comes less than a fortnight after Treasury Secretary Steven Mnuchin said the so called trade war was "on hold" while US and Chinese negotiators thrashed out a strategy designed to reduce the bilateral US-China trade deficit, which saw fears of an escalating tit-for-tat series of protectionist trade measures recede.

"I instructed Secretary Ross to consider initiating a Section 232 investigation into imports of automobiles, including trucks, and automotive parts to determine their effects on America’s national security. Core industries such as automobiles and automotive parts are critical to our strength as a Nation," President Trump said in a statement last week.

Thursday's steel tariffs and the recent statements on China come hard on the heels of a separate decision by President Trump to initiate a section 232 investigation, under the Trade Expansion Act 1962, into the current automotive landscape with a view to assessing whether it is necessary for America to impose higher tariffs on imported cars.

This was the same tactic deployed by the administration ahead of the steel and aluminium tariffs that are now expected to come into effect this week. Those tariffs only came about after a 232 investigation by Commerce Secretary Ross, which took more than six months to complete, found the current metals landscape is a threat to the US metals industry and so also, to national security.

The implications for the Dollar in a world where trade war fears are resurgent are unclear, not least because analysts and economists are divided over what kind protectionist policies will mean for currencies, particularly as the US is the world's largest economy and the Dollar the world's reserve currency. However, the same cannot be said for the Euro.

"Italy is still in a state of flux, although it does look like may finally have a bit more certainty by the end of the day, with Salvini having cancelled his scheduled rallies to head back to Rome and talk with Di Maio," says Marck McCormick, North American head of FX strategy at TD Securities.

The Euro-to-Dollar rate was hit hard this week after Italian President Sergio Mattarella vetoed a proposal by Five Star Movement and League party leaders to appoint an arch Eurosceptic to the position of finance minister as they sought to agree ministerial positions in a likely coalition government.

This put so called Eurozone breakup risk back on the table and raised the specter of another election later this year that could result in an even stronger mandate for the two parties whose only real uniting ideological belief is a dislike of the Euro. Europe's largest steel plant, Ilva, also happens to be in the impoverished south of Italy.

This is the backdrop against which the European Union will be approaching a so called trade war with the United States. And while metals are a long way from being an economically significant industry for many European countries, given total EU metals exports to the US were little more than €6 billion in 2017, the automobiles sector is far more important.

The automotive sector is important not just because it is a key German and French industry that generates hundreds of billions of Euros worth of turnover each year, but also because it employs hundreds of thousands of workers across the continent, many of whose jobs are dependent on exports to both the United States and China.

The US Dollar index was 0.10% at 94.06 following the announcement Thursday, after reversing an earlier loss, while the Euro-to-Dollar rate was up 1.13% at 1.1688 after paring earlier gains. The Pound-to-Dollar rate was 0.29% higher at 1.3321.

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