The US dollar headed to its best weekly performance in almost three years against major currencies, increasing 3.2% in July as President Donald Trump imposed new tariffs on dozens of trade partners, with the dollar index rising 2.4% in one week to reach 100.13, the highest point in nearly three years, and currencies of countries that would be severely affected surged sharply amid the rising concerns about political interference and the Federal Reserve policy.
Trump’s aggressive tariff strategy drives unprecedented currency market volatility
The dollar has been gaining momentum every day and is currently on a course toward its strongest performance in the last three years against major currencies, which is followed by the sharp decline of currencies of highly affected countries, like Switzerland, which now has a tariff of 39 percent, which makes the Swiss franc fall as low as it has been in the last 6 weeks, according to Economies.com.
The Canadian dollar was also on the head towards a seventh consecutive weekly decline following the US putting 35% tariffs on Canadian imports, an increase over the earlier threatened tariffs of 25%. A significant part of the dollar’s strength this month is attributed to the faith of the investors that the US economy has not been adversely affected by the tariffs set by Trump and that inflation has not soared.
Despite the increasing political pressure, the Federal Reserve is being hawkish
Although Trump is putting pressure on Federal Reserve Chair Jerome Powell to reduce interest rates, the US central bank of the US has stated that it has no hurry to loosen the monetary policy. Chief analyst of IG Chris Beauchamp said that even worse-than-anticipated figures in Friday’s jobs report will not change that position by much.
Monetary policy is challenged in unprecedented ways by political interference
According to Convera, there is a cause for concern with the recent increase of political interference in the U.S. As markets have become accustomed to unpredictable trade policy and on-off threats to the independence of the Fed, the present-day question of data integrity is like a new world, and the recent resignation of Governor Kugler from the FOMC board further complicates matters.
Powell is now caught between two battles: to reduce rates and to ensure confidence in the macro data in the future. Following the U-turn on Friday, where the dollar lost 1.2 percent of its 3.2 percent gains it made in July, after the jobs report, markets have settled, though there will be increased volatility in currency markets.
The trade tension is increasing and putting pressure on the Canadian economy
After weeks of tough talks, a new 35 percent tariff on Canadian exports into the U.S., and a deal was not achieved, and so the Canadian Minister of Canada-U.S. Trade, Dominic LeBlanc, walked out of Washington last week with no deal. Even with this new step, about 90 percent of Canadian exports to the U.S. bypassed the border duty-free in May, in large part due to the CUSMA/USMCA trade agreement.
Trade uncertainty has been experienced in the key areas, such as the current economic performance of Canada, with the most recent monthly GDP projection being -0.1 per cent in May due to diminutive mining and oil and gas mining activities. The USD/CAD pair has begun the week on a relatively calm note after the weak U.S. jobs data and is working around the 1.38 mark.
The 3.2% July rise of the US dollar can be described as a complicated combination of tariff driven strength, political interference issues, and uncertainty in the Federal Reserve policy, the aggressive trade policy adopted by Trump created unprecedented volatility in the global currency markets and posing central banks around the world with tougher decisions in their monetary policy in the face of rising geopolitical tensions.