Stocks and the Dollar React to Rumors of New Tariff Policies

The initial impulsive reaction to headlines about Trump’s tariffs was a slight drop in U.S. stock futures, but this is likely better news for stocks than the alternative policy. Trump had previously called for universal tariffs to reach 10% to 20%. This means that any plan that only targets critical imports, as suggested by the Washington Post report, would leave a smaller footprint on global trade. S&P futures are now testing session highs, while the dollar is weakening.

The dollar’s reaction to the Washington Post report that the future U.S. administration might consider targeting taxes on imports to specific industries, instead of applying them broadly, shows how much of the dollar’s strength is based on expectations of broad and early tariffs. This also suggests that the recent strength of the dollar is more dependent on fiscal policy than monetary policy. Many currencies are benefiting from the decline in the dollar, which is logical given that the Washington Post report was unclear about which industries could be excluded. The euro, pound, and Mexican peso are at their strongest levels for the year.

The fact that so much of the dollar’s strength depends on tariff policy also has implications for inflation and interest rates. All else being equal, adding taxes on imports raises consumer prices. But how much of that increase is passed on to the cost of living depends on many factors, particularly how much losses companies are willing to absorb (many, if their taxes are reduced elsewhere, it is assumed) and how much the currency appreciates. Today’s movements will shed light on how much of the tariff burden could be alleviated by a stronger dollar.