Trump's 50% Tariff on Steel, Aluminum Doubles, Weakens Dollar by 8.4%

The recent implementation of new tariff policies by U.S. President Trump has had a profound impact on the global economy, leading to a slowdown in U.S. imports and exacerbating concerns about global economic growth. These policies have also reignited fears of inflation. The announcement of a 50% tariff on imported steel and aluminum, effective from June 4, has caused a surge in metal prices in the U.S. This move, which doubles the tariff rate previously implemented in March, has further complicated the economic landscape.

The tariff policies have not only affected the U.S. economy but have also raised concerns about the global economic outlook. The weakening of the U.S. dollar, which has depreciated by 8.4% against six major currencies this year, has added to the economic uncertainty. The dollar's decline has made dollar-denominated commodities, such as oil, more affordable for buyers using other currencies, providing some support to commodity prices.

Investors are increasingly worried about the potential impact of these tariffs on global economic growth. The threat of higher tariffs has led to a shift in investment strategies, with investors moving away from U.S.-centric assets. This shift is seen as beneficial for emerging market economies, as a weaker dollar can stimulate their economic growth. However, the overall economic outlook remains uncertain, with concerns about inflation and economic growth persisting.

The tariff policies have also had an impact on the energy sector. The threat of new tariffs has raised concerns about economic growth and inflation, leading to a decline in the U.S. dollar. This has provided support for commodity prices, as a weaker dollar makes these commodities more affordable for buyers using other currencies. The energy sector, in particular, has seen some stability despite the economic uncertainty, with oil prices holding steady.

The tariff policies have also had an impact on the global trade landscape. The threat of higher tariffs has led to a deterioration in trade relations between the U.S. and other countries, including China. This has raised concerns about the potential impact on global economic growth and has led to a shift in investment strategies, with investors moving away from U.S.-centric assets. The overall economic outlook remains uncertain, with concerns about inflation and economic growth persisting.

In addition to the tariff policies, the U.S. Congress has introduced a new tax proposal known as the "revenge tax." This proposal, included in the recent tax and spending bill, authorizes the U.S. government to impose additional taxes on investments from countries with unfair or discriminatory tax systems. This move is seen as a response to the digital services tax imposed by European countries on U.S. tech giants, which has been a long-standing point of contention for the Trump administration.

For example, European investors who repatriate capital gains, dividends, or interest from U.S. government bonds may face additional tax burdens. This new tax proposal has raised concerns among global investors about the potential impact on their investments in the U.S. market. John Hardy, global macro strategy manager at a major bank, noted that this new measure could deter global surplus capital from flowing into the U.S. capital market, further weakening the dollar.

Despite the economic slowdown in the eurozone, the euro has appreciated by 11% against the dollar this year. Similarly, the Japanese yen has strengthened by 9%, despite its short-term investment yields being almost non-existent. The British pound has also appreciated by 8%, despite the Bank of England's rate cuts and the slowing economic growth in the UK. This trend highlights the dollar's relative weakness against other major currencies.

The weakening of the dollar poses both opportunities and challenges for the U.S. economy. While a weaker dollar can boost U.S. exports and reduce the cost of repatriating foreign earnings, it also presents long-term challenges for the U.S. financial market. The U.S. relies heavily on foreign capital inflows to support its stock market, keep bond yields low, and maintain the dollar's value. The Congressional Budget Office (CBO) projects that the U.S. fiscal situation will continue to deteriorate, with federal debt expected to exceed 50 trillion dollars by the mid-2030s. In this context, sustaining foreign capital inflows is crucial for the dollar's long-term stability.

The recent decline in the dollar index, from over 110 at the beginning of the year to around 99 by the end of May, has raised concerns about the dollar's credit system. Economists and institutions have warned that the combination of high debt levels, economic weakness, and policy reversals could further strain the dollar's credit system. Martin Lück, a German economist, noted that the U.S. government's debt and tariff policies are pushing the country towards a financial crisis. He highlighted the declining number of investors willing to buy long-term U.S. bonds and the eroding confidence in the U.S.'s ability to manage its debt, which could lead to a loss of confidence in the dollar.

The root of the dollar's credit crisis lies in the deep-seated contradictions within the global economic governance system. The U.S. has long relied on fiscal deficits to stimulate growth, leading to a national savings rate that is consistently lower than investment needs. This has necessitated an expansion of the current account deficit to attract international capital. While this model has been sustainable under the dollar-dominated monetary system, the rapid increase in debt relative to economic output has made debt monetization inevitable. The Federal Reserve's quantitative easing policies have temporarily alleviated debt pressures but have created a vicious cycle of actual bond yields and inflation expectations, ultimately leading to unsustainable debt levels.

The erosion of confidence in the dollar is evident in various aspects of the market. While foreign central banks have not yet engaged in large-scale selling of U.S. bonds, there is a noticeable trend towards diversifying reserve assets. The demand for gold as a traditional safe-haven asset has also increased, reflecting concerns about the current settlement system. Additionally, the U.S.'s weaponization of the dollar has exacerbated systemic risks, as financial sanctions not only target specific countries but also undermine global trust in the dollar's neutrality.

If the dollar's credit system were to experience a sudden and severe disruption, the repercussions would extend far beyond the financial sector. Global supply chains could be disrupted due to payment and settlement issues, leading to a reconfiguration of pricing power for major commodities. The international trade rules system could fragment, and historical experience shows that currency system changes often coincide with sovereign debt crises and volatile capital flows. Emerging markets, in particular, are vulnerable to such shocks. Even if the dollar's status declines, a stable alternative mechanism is unlikely to emerge in the short term, potentially leading to a scenario of competitive currency devaluation and intensified policy conflicts.

In response to these potential crises, the international community is exploring various mechanisms to mitigate the risks. The International Monetary Fund's long-standing efforts to reform the allocation of Special Drawing Rights can enhance liquidity support for emerging economies. Regional settlement systems, such as the ASEAN local currency settlement framework and the African Continental Free Trade Area payment network, can reduce dependence on the dollar. Cross-border cooperation in the digital currency sector is also progressing, with pilot projects for multi-central bank digital currency bridges providing new paradigms for cross-border payments. While these efforts may not immediately reverse the dollar's dominant position, they open up new possibilities for a more resilient international monetary system.

The crisis facing the dollar's credit system exposes deep-seated contradictions within the global financial system, including the mismatch between the responsibilities and rights of countries with international reserve currency status, the imbalance between sovereign debt monetization and financial globalization, and the conflict between short-term speculative capital and long-term value investment. To effectively avoid the "dollar trap" and its vicious cycle, it is essential to accelerate reforms in areas such as fiscal discipline, monetary power balance, and technological innovation. Additionally, efforts to reform the IMF's quota system and establish cross-border digital currency settlement standards should be expedited to optimize and improve the global financial order, providing new opportunities for global economic governance.