The US dollar has experienced a decline as President Donald Trump implements his tariff policies, with a significant drop occurring after the announcement of unexpectedly steep duties on “Liberation Day.” This development contradicts market forecasts which had anticipated a stronger dollar prior to the initiation of the trade war. The weaker dollar results in more costly imports, further exacerbating the expenses associated with Trump’s assertive import taxes.
This year, the US dollar index, which measures the dollar against a group of other global currencies, has decreased by 4.7%. This drop reflects investors’ growing concerns about the economic fallout from the expanding range of tariffs. President Trump has already imposed tariffs on China, Canada, Mexico, steel, aluminum, and automobiles. On Wednesday, he surprised global markets again by announcing even more extensive tariffs on nearly all trading partners, surpassing prior expectations.
According to Fitch Ratings, the overall effective tariff rate is estimated to be around 25%—the highest level since 1909—up from a previous estimate of 18% and a significant increase from last year’s rate of 2.3%. Consequently, JPMorgan economists have raised the likelihood of a recession to 60%, up from a prior 40%.
The “Liberation Day” announcement caused the dollar index to drop more than 2%, marking the largest single-day loss in nearly a decade. This follows an earlier decline as the continuous imposition of tariffs has diminished the outlook on the US economy and American assets.
Originally, during the presidential campaign, Wall Street’s “Trump trade” speculated that tariffs would shift the balance of exports and imports in favor of the US and strengthen the dollar. However, the stringent tariffs enacted have undermined the notion of “American exceptionalism” that has previously characterized the US economy and financial markets.
Businesses are expected to absorb some tariff-related costs while passing others onto consumers. It is estimated that the additional expense of auto tariffs alone could lead to a price increase of $5,000 to $10,000 per vehicle.
Former Treasury Secretary Larry Summers has indicated that the overall net impact of the tariffs could cost a family of four approximately $300,000. Additionally, a weaker dollar will further increase the cost of imports from certain countries. For instance, a car from Germany priced at 50,000 euros would convert to around $55,000 at the current exchange rate of $1.095 per euro, before accounting for tariffs. This is about $4,000 more than in early January when the “Trump trade” was at its height, and the exchange rate was $1.02 per euro, with speculation of possible parity.
Conversely, a stronger dollar would decrease import costs. During his confirmation hearing, Treasury Secretary Scott Bessent suggested that the dollar could appreciate by 4% in response to a 10% tariff, ensuring that the tariff is not fully passed on to consumers.
President Trump, meanwhile, expressed indifference to concerns that tariffs on foreign cars would lead to price increases, suggesting that higher prices would redirect consumer preference towards American-made vehicles. “I couldn’t care less if they raise prices, because people are going to start buying American-made cars,” Trump stated in an interview with NBC News.
This report was initially published on Fortune.com.
