Protectionism Clouds U.S. Dollar Outlook

Posted Mar 18, 2018

Any boost the U.S. dollar might receive ahead of Wednesday’s anticipated Fed rate hike is likely to be offset by the longer-term ramifications of newly introduced U.S. tariffs and Washington’s broader trade policies, thinks the team at Bank of America Merrill Lynch.

Supporting BAML’s belief are the results of the bank’s March survey of sixty-six global fund managers.

Collectively, when asked what the immediate effects might be from an escalation in trade tensions, fund managers suggested a weaker dollar and lower equity prices.

“I think trade is very complicated for the dollar. If we get trade retaliation…it could turn into a more complex situation,” said BAML strategist Ben Randol on Friday.

Trade concerns were enough for Lloyds to lower their year-end dollar forecasts last week. The British bank now sees the dollar fetching only 0.8 euros at year-end (EUR/USD 1.25), from a previous forecast of 0.82 euros. Meanwhile, both Boris Schlossberg of BK Asset Management and Exante Data’s CEO Jens Nordvig agree that the dollar will fall heavily against the yen upon further protectionist measures.

Much has been made of Washington’s announcement in early March of new tariffs on steel and aluminium imports – tariffs designed to boost U.S. manufacturers. Following the announcement, trade and foreign ministers from a multitude of major trading partners, including those from Canada, the EU, Britain, Australia, Brazil and Mexico, expressed anger at the decision and several threatened retaliation.

The latest tariffs came eleven months after those imposed on Canadian softwood lumber imports, and more are likely. According to a CNBC source, Washington is now considering tariffs on $60 billion worth of Chinese goods.

What appears to be a Trump-driven agenda for U.S. protectionism is not entirely surprising given that “America first” was a frequently used slogan on Trump’s 2016 campaign trail, but dollar holders had hoped that this aspect of Trump policy would fall by the wayside, as is typical after a would-be-president actually wins an election and enters office. Alas, it appears Trump wasn’t kidding.


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