US President Donald Trump announced plans to raise all automobiles not produced in the US to 25%, effective April 2nd, the same day as his scheduled announcement of reciprocal tariffs. As the world’s largest importer of autos, the US will see its tariffs significantly impacting major suppliers from Mexico, Japan, South Korea, Canada, and Germany.
Fears that Trump’s auto tariffs could escalate trade tensions and fuel inflation elevated the USD. The USD Index (DXY) appreciated by 0.4% to 104.55, extending its rise from the 104 handle. US Treasury 10Y yield rose 4 bps to 4.35%, the critical resistance level in March. Chicago Fed President Austan Goolsbee warned that the Fed may take longer to lower interest rates. The University of Michigan reported that inflation expectations over the next 5-10 years climbed for the third straight month, rising to 3.9% in March from 3% in December. Fed Chair Jerome Powell could alter his assessment that tariff-driven inflation could be transitory if the Fed’s 5Y5Y inflation expectations begin to rise.
USD/JPY rose 0.7% to 150.57, closing above the 150 level for the second time this week. Japan will likely resist retaliation against US tariffs on its auto exports to the US. Despite unsuccessful efforts to seek exemptions, the government should continue to pursue diplomatic efforts to resolve trade tensions with the US. If the government starts to closely coordinate with the Bank of Japan on the economic risks posed by auto tariffs, markets may reassess its expectations for a June/July hike, especially after National CPI inflation retreated to 3.7% YoY in February from its two-year high of 4% in January. BOJ Governor Kazuo Ueno indicated plans to keep his options open before the next meeting on May 1st. Hence, expectations of the JPY acting as a haven will unlikely overcome the anticipated drag from Trump’s tariffs on Japan’s growth and rate outlook amid a Fed alert to rising long-term inflation expectations.
EUR/USD finally cracked below the pivotal 1.08 handle it held for two weeks. Trump’s latest tariff on autos will follow those on steel and aluminium. EU Trade Commissioner Maros Sefcovic expects the Trump administration to hit the bloc with reciprocal tariffs of about 20% next week. Investors reckon that the economic stimulation from the “ReArm Europe” Plan would not counterbalance the adverse impact of the US tariffs, particularly in the short term. Europe’s plan to respond with retaliatory tariffs on US goods would further strain transatlantic relations and hurt economic growth on both sides. European Commission President Ursula von der Leyen deeply regretted the US decision to impose tariffs on European automotive exports, vowing to jointly protect workers, businesses, and consumers across the EU.
Quote of the Day
“When you reach the end of your rope, tie a knot in it and hang on.”
Franklin D. Roosevelt
March 27 in history
The modern shoelace with an aglet (a sheath protecting the lace ends) was patented in England by Harvey Kennedy in 1790.
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