The US Dollar had a week of two unequal halves: up for the first three and a half days and down for the remainder. Its index against a basket of major currencies opened on Monday morning at 89.50 and as stock markets fell, volatility rose, and Fed Chair Jerome Powell hinted at the possibility of four 25bp hikes this year, so the USD index hit a high on Thursday of 90.50; back to where it was before US Treasury Secretary Mnuchin’s remarks in Davos in late January. On Thursday afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, however, the USD did not respond positively. Amidst fears of retaliatory action from other countries, the index gave back around half a point to 90.00 and fell further on Friday to 89.60.
President Trump tweeted on Friday that, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”. In response, most countries - including Canada, China and much of Europe - have issued statements condemning Trump's decision and threatened retaliatory action. The European Union vowed to “react firmly” with World Trade Organization-compliant countermeasures in the next few days. An EU Commission spokesman said that the EU already has counter-measures ready against US tariffs and stands ready to respond, whilst Canada, which is the biggest foreign supplier of steel to the US was furious: Ottawa said the US measures were “unacceptable.”
Over the weekend, President Trump doubled down on his threats. After hearing that the EU was considering specifically target measures on Harley Davidson motorbikes and Levi Strauss jeans, he tweeted that, “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” He went to say, “The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”. We’d note that the last time the US started a trade war over steel in 2002, the S+P 500 fell almost 30% and the USD fell 20% over the next 18 months until the WTO ruled the tariffs were illegal… The USD index opens this morning in Europe around 89.70.