Customers of the food market in Palma de Mallorca, Spain.
Andrey Rudakov/Bloomberg by Getty Images
As an economist Ring alarm bell About the influence of President Donald Trump Tariff Policy Regarding consumers and the U.S. economy, there is a group of Americans who may benefit: traveling abroad.
This is due to the impact of tariffs on the US dollar and other global currencies. Economists expect tariffs on foreign imports to strengthen the dollar Weak major currencies like the euro.
In this case, travelers will buy more purchasing power overseas in 2025, economists say. Their dollars will be further extended, such as accommodation, dining and guides characterized by local currencies.
“All other identical tariffs are good for the dollar,” said James Reilly, senior market economist in capital economics.
The dollar rises amid tariff threat
this Nominal broad US dollar index January, the highest monthly record goes back to at least 2006. Indexing the currency strength of currencies to major U.S. trading partners, e.g. EURCanadian dollar and Japanese yen.
Meanwhile, the Ice Dollar Index (DXY) This is another popular measure of the strength of the dollar since Trump’s Election Day victory – an increase of more than 3%.
Trump on Thursday A plan was developed to impose retaliatory tariffs Oppose trading partners on a country basis. The specific taxation will depend on the results of the Ministry of Commerce’s review, which the official is expected to be completed by April 1.
At the same time, Trump has Increased tariffs by 10% About Chinese products. All steel and aluminum imports have a 25% responsibility Will take effect on March 4. Additionally, 25% tariffs on Canada and Mexico could be subject to force in March, After 30 days of suspension.
Riley said the Canadian dollar provides an example of the impact of the tariffs.
On February 4, when Canadian tariffs are set to take effect, the US dollar nail Violating the highest level of the Canadian dollar for at least a decade, eventually regressing when Trump postponed his duties for a month.
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JP Morgan strategists wrote that the Trump administration raised about $370 billion of Chinese goods from an average of 3% to 19% during the 2018-19 period and by raising U.S. export tariffs from 7% to 21%, to China The average 3% rises to 19%.
JP Morgan reported that while other factors also influence currency transfers, uncertainty in trade policy “inclines to strengthen the dollar.” They wrote that the DXY index rose 10% in the 2018 tariff announcement window and 4% in 2019.
Why tariffs are good for the US dollar
Reilly explained that tariffs – even their threat – could strengthen the dollar relative to other currencies in several ways.
One key approach, he said, is through interest rates – especially the difference between interest rates in one country and the interest rates in another.
Tariffs are often considered inflation because import tariffs are Consumer prices are expected to be raisedat least in the short term, economists say.
Fed May raise interest rates To keep U.S. inflation covered, this has not yet returned to policymakers’ target levels after soaring in the pandemic era.
“We expect this dollar (USD) to remain strong in the short term, mainly in the context of U.S. inflation policies, especially tariffs,” Bank of America currency analysts wrote in a note Friday.
(Their analysis is “G10” country: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and the United States)
According to available information about Trump’s retaliatory tariff plan, the average effective tariff rate for all imported goods in the United States will rise from less than 3% now to around 20% – which will increase U.S. consumer prices by about 2%, and temporarily Raise inflation to 4% In 2025, North American chief economist Paul Ashworth estimated Thursday.
On the other hand, economies in other countries may suffer from U.S. levies, Riley said.
Take Europe as an example.
He said Europe may export less to the United States, which will have a negative impact on the European economy. This would make it more likely that the European Central Bank will lower interest rates to strengthen the economy, Riley said.
Rising U.S. interest rates and falling European interest rates will lead to wider interest rate differences.
Reilly said this dynamic could lead investors to transfer funds to U.S. assets, such as U.S. Treasury bills, in order to seek higher relative returns, resulting in them selling assets denominated in US dollars, Reilly said.
He said that in this case, higher demand for the dollar and lower demand for the euro could lead to a dollar.
Reilly said the euro and pound pound are particularly sensitive to this interest rate difference, while emerging market currencies are fewer.
Will the dollar weaken later this year?
Of course, there is great uncertainty about how the United States will apply for tariffs on other countries and whether the proposed taxes will take effect. Economists say retaliatory tariffs from trading partners could be cut at the rate of the dollar.
Bank of America analysts wrote that if the world retaliates against the United States and these trade policies “cause losses to the U.S. economy”, the dollar may weaken later this year.
Indeed, most investors expect that the dollar’s strength will be in the first or second quarter of 2025, according to a survey conducted by Bank of America, which was conducted from February 7 to February 12. Reaching its peak. 52 fund managers from the UK, continental Europe, Asia and the United States)
However, overall, most countries rely more on U.S. trade than the United States.
“So, they can’t really engage in American revenge,” he said.
