The tanking US dollar screams that tariffs are America’s Brexit moment

Not long ago, the widely held view on Wall Street was that President Trump’s plan for tariffs could potentially supercharge the strength of the dollar.

The idea was based on a couple of reasons. One was the idea that the US economy was the world’s strongest just a few weeks ago, and showed little sign of slowing. Strong economies tend to equate to strong currencies, primarily by having higher interest rates available on risk-free returns.

The expectation was that the imposition of tariffs would cause the currencies of America’s trading partners to weaken, serving as a “release valve” to offset some of the impact of tariffs on their exports from the perspective of US buyers. Think something like this: the US imposes a 25% tariff on Vietnam, and the dong weakens by 10% in response. In that case, when the likes of Nike are bringing shoes from Vietnam to the US, the move in the currency means the all-in cost of the imported good hasn’t gone up by the full 25%. Since all currency prices are relative, a weaker euro, yen, or dong automatically translates into a stronger greenback.

Looking at the markets today, those ideas look wrong, at least in terms of gauging the reaction to Trump’s massive tariff announcement yesterday.

The fact is the US dollar index — heavily weighted toward rich trading partners like the euro, the yen, and the British pound — is having its worst day in at least two years.

The dollar also weakened significantly against currencies of other countries, like Canada, Mexico, and South Korea, where America’s leverage as a top trading partner could reasonably be expected to mean tariffs would result in a weaker Canadian dollar, peso, or won.

Remarkably, in overnight trading, the dollar plunged against the off-shore traded Chinese yuan — China is effectively the largest and most high-profile target — before Chinese regulators seemed to step in and move the tightly controlled currency back in line with government policy.

In a sign of how much sentiment has shifted, Deutsche Bank Head of Currency Strategy George Saravelos came into the year calling for “bigly dollar” as his top theme, in part because a “tariff risk premium” would drive the value of the greenback higher. His views, of course, evolved over time as Trump 2.0 policies, and the market’s reception to them, took shape. Now, Saravelos is warning that a “dollar confidence crisis” may be brewing.

“The safe haven properties of the dollar are being eroded,” he wrote in a note on Thursday. “Beyond that, developments since the start of the year make us worried about a broader undermining of confidence in the US economic outlook and the medium-term desirability of dollar allocations.”

So, what’s going on? Well, one way to interpret the surprising weakness of the buck today is that the scale and size of the tariffs Trump sprung yesterday — which could raise US trade barriers to levels not seen since 1909 — are going to be even more of a shock for the US economy than they will be for our trading partners. Think of this as America’s version of Brexit: a self-imposed supply shock that serves to make the nation poorer.

If the exchange rate is not cushioning the blow of tariffs, that means US consumers and Corporate America will be forced to bear the brunt of this adjustment. The lower dollar reflects lower US purchasing power at the same time tariffs are raising the cost of importing goods. That’s an ugly combination for consumers, and makes the outlook for spending unambiguously worse than it was one day ago.

The subsequent rapidly escalating risk of recession in the US is driving a rapid reassessment of the relative strength of the US versus other countries, as well as a convergence in shorter-term interest rates.

To put it another way, if the US had prosecuted a targeted trade war against a few strategic nations, that would have been bad news for those nations. But by massively tariffing the entire world all at once, that’s primarily very bad news for the US itself.