DXY was up Friday but will be down today as Trump strikes a tariff deal with Europe at 15% tariff. Bloomberg.
Von der Leyen and Trump also differed on some of the key terms of the deal they announced. The US president said the tariff level would apply to “automobiles and everything else,” but not pharmaceuticals and metals. Steel and aluminum “stays the way it is,” the US president added, and drugs are “unrelated to this deal.”
The chief of the EU’s executive arm said later at a news conference that the 15% rate would be all inclusive, wouldn’t stack on top of industry-specific tariffs and would cover drugs, chips and cars. Metals duties “will be cut and a quota system will be put in place,” she said.
…The EU agreed to purchase $750 billion in American energy products, invest $600 billion in the US on top of existing expenditures, open up countries’ markets to trade with the US at zero tariffs and purchase “vast amounts” of military equipment, Trump said. Von der Leyen said no decisions have been made on European wine and spirits, but the matter would be sorted out soon.
This brings the total US tariff rate to about 16%. It is likely to continue the bullish trend in AUD as it tracks EUR higher. Goldman.
The deals have been generally consistent with our economists’ expectations for a reset higher in the baseline tariff rate offset by some key reductions in sectoral tariffs.
We think this direction of travel should keep the Dollar under pressure both by avoiding more disruptive outcomes that could have activated Dollar safe-haven flows and codifying higher tariff rates that will likely weigh on US terms of trade, especially as the baseline tariff turns from a “pause” placeholder to the new reality.
Now that markets have a better sense of the local landing zone, manageable but meaningful changes in tariff rates should weigh on the relative prospects for US economic performance, which will reduce foreign investor appetite, and thereby continue to erode the Dollar’s strength.
Some of the tariff inflation that has yet to arrive has been suppressed by global corporations shifting production from one factory to another to arbitrage varying tariff rates.
The more that these large “deals” get done, the less possible this becomes.
That said, we are a long way from the previously threatened 25% tariff on cars and 200% on wine.
On balance, markets are likely to also take this as an inflation positive, so we can add Fed cuts to the DXY downside.
AUD to the moon!
