US President Donald Trump's tariff policy has caused significant changes in the global currency market. How do tariffs affect the dollar exchange rate, inflation and economic growth? We understand the complex relationships and analyze research by investors and ordinary citizens.
President Donald Trump has imposed the largest tariff hike in the U.S. in a century, sending ripple effects throughout the global economy. The tariffs have turned the massive $7.5 trillion-a-day currency market into a key focus for investors around the world. What does this mean for everyday people, and how do tariffs affect money?
Currency and tariff connection
When a country faces tariffs on its exports, its currency often weakens, Bloomberg explains. For example, if Chinese goods become more expensive for American consumers because of tariffs, demand for those products — and therefore for the Chinese yuan needed to produce them — decreases. This reduced demand lowers the value of the yuan against the U.S. dollar.
The opposite also happens. When other countries impose tariffs on American products, foreign consumers buy fewer American goods, potentially reducing demand for dollars and weakening the dollar.
But there’s a complicating factor: Tariffs tend to increase inflation in the country that imposes them. As imported goods become more expensive, prices rise across the board. Central banks often respond to inflation by raising interest rates, making that country’s currency more attractive to investors looking for bigger returns. This can strengthen the currency—at least in the short term.
The longer-term picture is more nuanced. Persistent inflation hurts economic growth as consumers tighten their belts and businesses face rising costs. This economic slowdown can make a country less attractive to investment, ultimately weakening its currency despite higher interest rates.
US President Trump has spoken directly about potential short-term economic disruptions, describing them as “a little bit of a mess.” He argues that his tariff strategy will generate significant revenue and create a more balanced trade relationship.
Market Volatility as an Opportunity for Some and a Challenge for Others
Currency market fluctuations create clear winners and losers:
- Profiting from the instability are money-makers and currency traders, who profit from price differences and market configurations. Banks are expanding their currency trading teams and hedge funds are increasing their currency positions in anticipation of tariff-induced market volatility.
- Among those facing problems are multinational corporations and businesses involved in international trade. For these companies, unpredictable exchange rates create planning difficulties and increase the cost of hedging against currency risks. Even individual investors with international holdings are stepping up their hedging activities to protect themselves from adverse currency movements.
Current market conditions
Despite significant moves in individual currencies, overall currency market volatility has remained subdued since Trump took office.
While tariffs have been imposed on Canada, Mexico and China, ongoing negotiations raise uncertainty about their permanence. For example, the White House recently granted automakers in Mexico and Canada a one-month waiver, and Trump is considering relief for some agricultural products. Such decisions could strengthen currencies like the Mexican peso and Canadian dollar, which have recently fallen to low levels.
Impact on the US dollar
The Bloomberg Spot Dollar Index hit its highest level in more than two years in early February on expectations that Trump’s tariff policies would boost inflation and delay a Federal Reserve rate cut. But a series of weak economic reports has shifted investors’ focus to growth concerns. Markets were still expecting the dollar to strengthen further into early March, but money managers were confronted with conflicting forces that could change the outlook, including a sharp increase in European defense spending and related tariffs from other regions.
However, recent weak economic data has shifted investors' focus to concerns about economic growth. While investors were still bullish on the dollar at the start of March, they now have to consider other factors that could change that outlook, including increased defense spending in Europe and related tariff measures from other regions.
As currency dynamics continue to evolve, they will impact Americans and their vacation spending, import prices, income, investment, and global economic stability.
Author: Anastasia Kuprienko
Read also:
- Cryptocurrency vs. Gold: What Will Become the Main Means of Preserving Capital in the Future
- Is it profitable to buy gold bars: prices for precious metals and investment conditions
- How to earn money and “do nothing”: what is passive income and how much money can you get