The debate regarding the impacts of President Trump’s tariffs rages on. While there is a 30-day pause on his 25% tariffs on Canadian and Mexican imports, the threat of tariffs on European imports continues to linger. It's widely believed that levying additional tariffs will lead to inflation. Tariffs are paid by the domestic importers when products reach the United States. The extra costs resulting from the tariffs are often passed onto the customers in the form of higher prices on products in the consumer discretionary and consumer staples sectors. These higher prices fan the flames of inflation.
Tariffs Could Trigger a Stronger US Dollar
The threat of Trump’s 25% tariffs on Canada and Mexico caused the US Dollar Index and the Invesco DB US Dollar Index Bullish Fund (NYSE: UUP ) to spike a day before they were deployed on Feb. 4, 2025, but fell when a 30-day paused was announced. This demonstrates that tariffs can trigger a higher US Dollar .
Higher tariffs on imports reduce the demand for imports. Imports are priced in foreign currency, resulting in a reduced demand for those foreign currencies. Barring any retaliatory tariffs (which is highly unlikely), foreign demand for US goods and the US dollar not only remains unchanged but increases relative to foreign currencies. This increase in relative demand causes the US dollar to strengthen and rise.
How a Stronger US Dollar Can Mitigate Tariff Inflation
As the US dollar strengthens, purchasing power also improves. Normally, it would result in being able to purchase more imports for less money due to the increasing buying power of a rising dollar. A rising dollar lowers the cost of imports. However, levying tariffs on imports increases the cost of imports. In essence or theory, a strong US dollar would offset the rising cost of the imports from the additional import tariffs. They would cancel each other out, thereby mitigating the inflationary effects of tariffs.
How Inflation Can Cause Interest Rates to Rise
Assuming that inflation starts to rise sharply due to the higher costs for consumers as a result of tariffs, especially if there are retaliatory tariffs applied, the Federal Reserve will be forced to intervene. If inflation rose too fast, they would have no choice but to raise interest rates. This will directly cause the US dollar to rise. The US dollar would likely rise ahead of the actual rate hikes as the market is extremely forward-thinking.
The United States is the world’s largest importer. If Trump levied a tariff on all imports, that has the potential to slow growth internationally. A war of attrition would likely slow growth outside of the United States. This decrease in production makes foreign investment and currencies less attractive. It could cause foreign investors to partake in a flight to safety right back into the US dollar.
Does Trump Want a Weaker or Stronger US Dollar?
Trump often criticized the Biden administration for causing the surge in the US dollar. Trump had been a proponent of a weaker dollar in the past as it would help American exports compete better internationally. Trump had asserted that the strong US dollar had hurt the country’s export effectiveness and contributed to the trade deficit. However, his preference has reversed after taking office as the 47th President of the United States.
Treasury Secretary Insists on a Strong US Dollar Policy
President Trump’s newly appointed Treasury Secretary Scott Bessent, a former hedge fund manager, stated that a strong US dollar policy is completely intact under President Trump. Bessent favors a strong dollar, stating, “We want the dollar to be strong. What we don’t want is other countries to weaken their currencies, to manipulate their trade.”
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