Trade War & Deficit: How U.S. Dollar Responds to Policy Landscape

Trump announced a 3 week extension on the deadline for new tariffs while reiterating that US trading partners could still face higher rates if no deal is reached.

Treasury Secretary Scott Besson says multiple trade announcements are coming.

Meanwhile, Trump threatened a 10% tariff on countries aligning with BRICS without naming specific policies.

Joining us from London to talk currencies is Elias Hadad, Vice President.

And senior market strategist at Brown Brothers Herman.

Elias, great to have you back on.

Thank you so much for joining me.

So first and foremost, we are looking at the second half of the year.

So let's start out with a conversation about trade policy as well as the US currency.

Now the US effective average tariff rate is at its highest since the 1930s, so break down the risks for us, especially when it comes to the US currency.

Yeah, well, good morning, Remi, and thank you for having me on your show.

Indeed, I mean, up to date, at least as of July 7th, the average effective tariff rate is now close to 18%.

So as you pointed out, that's a high since 1934, and it's probably going to go higher later, at least by August 1st.

Um, but the key here is that, you know, you've got these protectionist trade policies in the US, you know, highlighted by the higher, higher tariffs.

I think that's that it continues to be an ongoing drag for the US dollar, for three reasons.

Number one, well, higher tariffs, let's say downside risk to growth, upside risk to inflation, right?

So there's a heightened risk that the US uh.

Enters a period of stagflation.

I think that remains a key risk right now for the US economy.

Secondly, the ongoing trade war also threatens to accelerate the dollar's declining role as a primary reserve currency.

Now, don't get me wrong, I don't think that the US dollar will lose its primary currency status, but its share will Uh, probably the, the share of the dollar's importance will decline and probably decline a bit further because of this ongoing trade war and uncertainty with reflect with respect to US trade, fiscal and even security policies.

And, and finally, it's, it's important to remember, right, that if your, if your goal is to, and your aim as The Economy is to reduce your trade deficit, right, which is the US where the Trump administration core objective.

Well, that means you'll have less US dollar flowing overseas and that also means less US dollar coming back to the US being recycled in US securities.

So for these three reasons we think that the fundamental down trend in the US dollar is intact.

Well, another area that I want to ask you about, Elias, is emerging currencies as well as rate differentials.

So the 17th BRICS summit has wrapped up in Brazil and while broader tariffs negotiations remain a fluid situation, central banks are keeping Close eye on how things unfold and when it comes to the US, the Fed is juggling the need for clarity amid hardy labor market figures as well as inflation figures and deteriorating growth.

So what will it take to get out of the so-called wait and see mode for the Fed?

Yeah, that's a great question.

I mean, if it was up to the Trump administration, it'd be already cutting interest rate to 1%, but clearly the economy right now means that the Fed is in a good place to wait.

I mean, you look at the last.

Non from payroll's report, uh, it was quite good.

I mean, there's still some weakness under the hood.

A lot of the, uh, uh, increase in on from payrolls were in non-cyclical uh government and, and uh government jobs.

The participation rate went down, hours were went down.

Um, and wage growth slowed, but overall labor markets still resilient.

Uh, inflation is relatively contained and sticky above the Fed's 2% target.

Uh, so, you know, I think Fed Powell and, and, and the board in general are right to, to, to adopt this wait and see, to see how the tariffs will.

Impact the economy and inflation because right now you look at the Fed's forecast and it's basically telling you there's a risk of stagflation, right?

The, the Fed back in uh in June, they lower GDP growth and they've raised their PCE inflation forecast.

So clearly they're, they're, they're worried.

And that's why they're adopting this wait and see.

So I think the market, you know, they're pricing in the 25, the next 25 basis points cut in September.

I think that's, uh, uh, that's reasonable, and, and, uh, and beyond that, we'll, we'll have to see how, how the tariffs impact inflation and the economy.

And building on that, I do want to get your take on rate differentials.

It's no secret that the gap between the Federal Reserve here in the US and global central banks is widening.

So what are the implications of these dynamics for the major currencies as we enter the third quarter of 2025?

That's a great question, question, Rey.

In fact, you know, you look, so Fed funds' futures, they're pricing in roughly 100 basis points of easing over the next 12 months, right?

Now the Fed is probably going to resume easing in September.

Meanwhile, other major central banks are probably close to the end.

Of their easing cycle, right?

Look at the ECB, the RS Bank, RBA today, uh, RBNZ.

A lot of these central banks, yeah, have probably one more rate cut in the pipeline, maybe 2 at most, uh, but generally speaking, they're, they're they're close to wrapping up their easing cycle, whereas the Fed, uh, there's more easing in the pipeline, so rate differentials moving against the US dollar as we speak.

And finally, before I let you go, earlier we had the dollar index chart up and we are currently looking at it right below the 98% level, but for the rest of 2025, do you have any levels that you're watching and also for any of the major currency pairs?

I mean, the Euro 120 is a bit of a line in the sand in terms of potential near term top, but it wouldn't be unusual to see a bit of an overshoot beyond even 120.

And you know, you look at fundamental fair value for the euro, it's probably close to 110.

So if we get to 120, we're in that 10 to 15% overvaluation range that could that could mean that the euro, it gets overstress.

Uh, but, uh, you know, overall, the dollar is still overvalued against most major currencies, uh, and that means that there there is more scope here for the dollar to revert back towards its mean, and that means more downside for the second half of this year.

Well, Lice, we will have to leave it there, but as always, thank you so much for joining us and thank you for sharing your insights and perspective.

Thank you, Remy.