During President Trump’s first term, the sequence of tax cuts followed by tariffs was linked to a strengthening dollar. Currently, protectionism appears to be occurring without the same level of fiscal support.
The dollar’s near-term performance may depend on US equity markets, as trade wars typically have negative impacts on equities. A decline in US stocks could lead to the outperformance of the Japanese yen and Swiss franc, potentially pulling USD/JPY and USD/CHF down.
Impact Of Tariffs On Fiscal Plans
Tariffs implement revenue for fiscal plans, suggesting they could become broader over time. President Trump’s agenda aims to revive high-paying manufacturing jobs in the US, complicating the outlook for currencies related to commodity exports.
Anticipations indicate that the dollar may strengthen in the first half of the year, although challenges will arise from European currency fluctuations affected by tariff developments and defence spending strategies. The DXY may find support at 106.15/35 unless US equities decline significantly.
The pattern witnessed during Trump’s first term, where tax reductions gave the dollar a foundation before trade tensions took hold, is not playing out in the same way now. This time, restrictive trade measures are unfolding without commensurate fiscal easing. That distinction matters. It means the dollar does not have the same fiscal tailwind, making its trajectory less straightforward.
For now, what happens in US stock markets could be closely tied to short-term shifts in foreign exchange. Past trade frictions have generally weighed on equities, and if that happens again, we could see a stronger yen and Swiss franc. That, in turn, might mean downward pressure on USD/JPY and USD/CHF. If equities remain resilient, though, those moves may not materialise in the same way.
Potential Strength Of The Dollar
Something else to consider is the role of tariffs in shaping future fiscal policies. Levying import taxes brings in revenue, and if this administration continues down this path, the coverage could expand rather than stay limited to isolated sectors. The stated goal of reshoring well-paid manufacturing positions complicates things for currencies linked to raw material exports. That could translate into periods of weakness for those assets.
Looking ahead, there is some expectation that the dollar may remain strong through the early part of the year. However, the strength of European currencies will depend on responses to trade policies and defence commitments. Technical levels suggest the DXY could hold around 106.15/35 unless a deeper equity downturn prompts a broader retreat. If stocks start to slide in a pronounced way, we might need to reassess those levels.
