As President Donald Trump introduced tariffs, the US dollar experienced a decline, dropping significantly after unexpected steep duties were revealed on “Liberation Day.” This development contradicted market expectations prior to the escalation of the trade conflict. The weakening dollar makes imports more costly, adding to the expenses resulting from the aggressive import taxes imposed by Trump.
The decline of the US dollar index, which measures the dollar against a basket of global currencies, has reached 4.7% this year. This decrease reflects investors’ concerns over the economic consequences of the expanding range of duties.
Earlier this year, Trump extended tariffs to China, Canada, Mexico, and sectors including steel, aluminum, and autos. On a Wednesday, these actions were further intensified when Trump introduced unexpected tariffs affecting nearly every trading partner. Fitch Ratings estimated that the overall effective tariff rate would rise to approximately 25%—the highest since 1909—up from a previous estimate of 18%, and significantly higher than last year’s rate of 2.3%. Consequently, JPMorgan economists increased their recession risk assessment from 40% to 60%.
The “Liberation Day” announcement caused the dollar index to plummet by over 2%, marking its largest single-day loss in nearly a decade. This drop emphasized the decline already in motion due to previous tariffs undermining confidence in the US economy and assets.
Interestingly, this situation diverges from prior expectations. Wall Street’s “Trump trade” initially included a belief that tariffs would favor US exports and bolster the dollar. However, the actual tariffs have instead led to a decline in the American economy’s previously celebrated status of “American exceptionalism.”
Businesses are likely to absorb some tariff costs while passing the remainder onto consumers. Auto tariffs alone could potentially result in price increases of $5,000-$10,000 per vehicle.
Former Treasury Secretary Larry Summers suggested that the net impact of the tariffs would cost a family of four about $300,000. A weaker dollar would further increase import costs from countries like Germany, where a car valued at 50,000 euros previously equated to about $51,000, would now amount to $55,000 at the current exchange rate of $1.095 per euro, excluding tariffs.
Additionally, the stronger dollar expected earlier would have made imports cheaper. Scott Bessent, during his confirmation hearing for Treasury Secretary, mentioned that the dollar could appreciate by 4% in response to a 10% tariff, mitigating the tariff’s direct impact on consumer prices.
Trump himself expressed a nonchalant attitude towards potential price hikes on foreign cars, suggesting that it could lead to greater sales of American-made vehicles. He reiterated this viewpoint during an interview with NBC News, emphasizing that higher prices might drive consumers towards domestic options.
This content was originally published on Fortune.com.
