Trump’s Trade War Escalation Drives Dollar Down Amid Growing US Recession Concerns

By Staff, Agencies

President Trump has moved forward with imposing 25% tariffs on Canada and Mexico, triggering retaliation from Canada and an expected response from Mexico. These actions have raised concerns about global trade, contributing to a downturn in global equities. However, the dollar has not benefited from this uncertainty, as recession fears in the US continue to grow.

The US dollar index has fallen to its lowest level in 12 weeks, while the Pound has reached new two-month highs against the dollar.

The Euro has also gained momentum, supported by expectations that increased defense spending will spur economic recovery in the EU, pushing the Pound to Euro exchange rate lower.

Concerns about a US recession have intensified, particularly following a downward revision of the GDPNow model by the Atlanta Federal Reserve, which now forecasts a 2.8% contraction in US GDP for the first quarter.

The surge in imports to avoid tariffs is expected to negatively impact GDP, alongside worries about reduced personal spending and general economic activity. Tariffs are seen as particularly harmful to growth in Canada, Mexico and key US industries.

In response to these developments, the US 2-year yield has dropped to a four-month low, and markets now anticipate an 85% chance of a Federal Reserve rate cut by June, with the possibility of additional cuts during the year.

Scotiabank notes that the performance of the stock market could influence the direction of US trade policy moving forward.

While some analysts expect the dollar to strengthen in the first half of the year, others, like Stephen Innes of SPI Asset Management, highlight growing recession fears as a significant risk. UBS economist Brian Rose warns that the tariffs could deliver a severe shock to the economy, potentially overwhelming its current capacity.

In contrast, European equities have been less affected by the tariff fears, with the situation in Ukraine providing some offsetting support. The EU has been encouraged to increase defense spending, with new proposals for joint borrowing to finance defense initiatives.

Despite the US's economic challenges, BCA Research strategist Mathieu Savary suggests that Europe’s recovery from its current economic challenges may present investment opportunities.