Normally at a time of turbulence, the U.S. dollar, the ultimate safe haven, rises, but so far that has not been happening.
The conventional wisdom is that tariff increases are not inflationary. To oversimplify, this is for two reasons. Firstly, higher tariffs are a one-off price rise. This gives the inflation rate a brief bump while those price increases go in and out of the numbers, and that’s that. If the underlying conditions to support a longer lasting increase in the inflation rate are not there, everything calms down. Secondly, the higher prices resulting from the tariffs lead U.S. customers to shop at home, rather than selling dollars to buy goods manufactured internationally. As a result, the dollar rises, taking the edge off tariff-induced price increases.
Looking at the second leg of the “no worry” case, the argument that a strengthening dollar will help ease inflationary pressures cannot necessarily be taken for granted this time round. Normally at a time of turbulence (even if the source of that turbulence is American), the U.S. dollar, the ultimate safe haven, rises, but so far that has not been happening.
As US stock prices tumbled this month, John Sidawi, a fund manager at Federated Hermes, noticed something strange.
The dollar, long a go-to hiding place during market selloffs, wasn’t rallying this time as investors rushed for safety. It was sinking, too, and fast as hot money poured into gold, the yen, European stocks — almost anywhere but the US. . . .
The dollar has dropped against all but a handful of the 31 major currencies over the last three months, sending Bloomberg’s dollar index down nearly 3%, its worst start to a year since 2017. The price of gold — a rival haven — has surged to a record high of over $3,000 an ounce. By mid-March, speculative traders started betting against the dollar for the first time since Trump’s election amid fear his policy shifts could drive the world’s largest economy into a recession.
It’s worth adding that there has also been talk of trying to engineer a fall in the dollar by some Plaza Accord 2.0 deal. This is a bad idea, and I doubt (for reasons unconnected with the badness of the idea) that it will happen, but it’s not the sort of talk people looking for the dollar as a safe haven want to hear.
This suggests that any strengthening in the dollar flowing from reduced trade deficits might be less than expected.
And how about the idea that tariff-caused price increases will just be a blip with no longer-term impact?
The Wall Street Journal’s Matt Grossman gives some structural reasons to think that this is too optimistic an assumption:
[T]ariffs can add to inflation pressure in other ways. By reducing competition, trade barriers allow domestic producers to raise prices more. The gap between U.S. and world steel prices has risen sharply since January because of tariffs, for instance. With less foreign competition, domestic producers feel less pressure to adopt the latest technology or boost worker productivity, adding to cost pressures over the long term.
That’s plausible, I think, but the shorter-term inflation outlook (which wasn’t that great in the first place) doesn’t look so good either.
Economists say President Donald Trump’s protectionist trade agenda, marked by a rush of tariff action announcements since taking office in January, will boost prices of imported goods and drive inflation higher in the coming months.
Federal Reserve Chair Jerome Powell acknowledged last week that inflation had started to rise “partly in response to tariffs,” adding that “there may be a delay in further progress over the course of this year.”
“A delay in further progress.”
That’s one way of putting it.