Dollar Set for Weekly Gain Amid US Trade Deal Optimism

The U.S. dollar has rallied in recent trading sessions, buoyed by optimism surrounding the newly announced U.S.-U.K. trade deal. While the agreement represents a symbolic victory for President Trump’s “America First” agenda, its immediate economic impact remains limited, with broader trade tensions and structural challenges clouding the outlook. Investors must weigh the short-term market euphoria against the long-term risks of a fragmented global trade landscape.

The U.S.-U.K. Deal: A Framework, Not a Fix

The May 8 agreement between the U.S. and U.K. is the first major trade deal finalized under the administration’s aggressive tariff regime. Key provisions include:
- $5B in new U.S. exports: Including $700M in ethanol and $250M in agricultural goods like beef, addressing prior non-tariff barriers.
- Reciprocal tariffs: A 10% rate on most goods, with autos subject to a tiered system (10% on the first 100,000 vehicles annually, 25% thereafter).
- Steel tariff elimination: U.S. tariffs on U.K. steel dropped to 0%, easing a key friction point.

However, the deal’s practicality is under scrutiny. As CNN noted, it functions as a “memorandum of understanding” rather than a finalized agreement, leaving critical details unresolved. highlight the modest scale of the gains—$5B in a $23.6T U.S. economy—suggesting limited near-term GDP impact.

Why the Dollar is Rallying (for Now)

Market sentiment has propelled the dollar higher, with the USD Index climbing 1.2% this week. The trade deal’s announcement aligns with broader expectations that the U.S. will secure multiple agreements by the July 8 deadline, staving off punitive tariffs on remaining countries.

• Risk-off environment: Geopolitical uncertainty, particularly with China, has driven capital toward the dollar as a safe haven.
• Policy divergence: While the Fed holds rates steady, the ECB and BoE face inflation pressures, narrowing yield differentials and supporting the USD.

Yet, the rally may be short-lived. shows a contraction to 0.4%, with economists warning of supply-chain disruptions and rising input costs from trade wars.

The China Conundrum: The Elephant in the Room

The U.S.-China trade stalemate remains the critical wildcard. With tariffs at 145% on Chinese imports and Beijing retaliating at 125%, bilateral trade volumes have plummeted. reveals a collapse from $340B in annual deficits to near-zero, sapping global liquidity.

Administration claims of “progress” in talks are unfounded; U.S. officials admit it could take 2–3 years to resolve. Until then, the dollar’s gains are contingent on markets pricing in “trade deal optimism” rather than addressing the systemic risk of a U.S.-China decoupling.

Conclusion: Caution Amid the Cheerleading

While the dollar’s weekly gain reflects hope for trade normalization, the reality is far murkier. The U.S.-U.K. deal is a small step in a marathon of negotiations, with over 100 more agreements required by July—a timeline experts dismiss as “impractical.”

Investors should note:
- Structural risks: The U.S. now has the world’s highest effective tariff rate (22%), per the World Bank, deterring global capital flows.
- Economic drag: Trade wars have already shaved 0.7% off U.S. GDP in 2024, with 2025 estimates worsening.
- China’s leverage: Beijing holds $1.1T in U.S. Treasuries—a weapon it could deploy if tensions escalate.

The dollar’s rally may continue in the short term, but the path to sustained strength requires more than optimistic headlines. Until the U.S. resolves its trade war with China—and negotiates credible agreements—this is a market built on sand.