All signs are pointing to the dollar heading lower. Will it?
As Trump’s tariff war reignites, everyone is assuming the dollar will continue its path lower. But the journey might be bumpy
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We’re all navigating the crosscurrents of the next leg of the tariff war, dollar positioning, and rates.
With the “Big Beautiful Bill” now signed and passed, the Trump administration’s gaze is now shifting back toward tariffs.
The true tariff rates are ever-changing these days, and the exact number keeps fluctuating.
That said, based on actual freight container volume transactions, we can approximate a current effective tariff rate of 21% on US imports — down from 54% at the peak of Liberation Day.
This dynamic is further muddied by the delayed effect in place for the collection of these duties at the border. It takes time to fully ramp up and operationalize this kind of surge in collections, and so actual tariffs collected are approximately half of the stated rate right now.
It’s evident that some form of a tariff strategy is in place. But assuming they will go back to the pre-election rate of 5% is unrealistic.
Putting this all together, it’s time to think about how this crosscurrent situates itself alongside currencies and the path of monetary policy. As we can see below, the dollar is now down 10.7% year to date, one of the largest-ever drawdowns for the first half of the year.
Mechanically, it makes sense for the dollar to be the primary exhaust valve for the impact of tariffs since it aggregates interest rate differentials and the path of monetary policy. Those are driven by inflation expectations, as well as cross-border capital flows.
The broad consensus is that these dynamics will continue to drive the dollar meaningfully lower, and that this could become turbocharged once it becomes evident who will replace Jerome Powell as the chair of the Federal Reserve.
If the new Fed Chair is someone committed to the 300-basis point cuts Trump is touting — and if that person can convince the committee to follow them — the dollar is destined for further weakness.
This framework all makes fundamental sense. The issue: This is the consensus view in markets right now, as we head into summer doldrums that often test positioning as volatility compresses.
Looking at current CFTC data, dollar positioning is the most bearish it’s been in years:
So, despite fundamentals pointing toward meaningful dollar devaluation continuing, I have a feeling the thesis will be tested over the summer, given it being such a crowded trade.
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