How to prepare for tariffs' impact on dollar

As the Trump administration has made good on its promises to impose new tariffs on imports from Mexico, Canada, China and the Eurozone, market analysts around the world are closely monitoring the economic repercussions. The outcomes remain unpredictable as political tensions rise and circumstances change daily.

The swiftly changing news surrounding tariffs has rattled investors, and the value of the U.S. dollar has dropped significantly in relation to foreign currencies, a sign of weakening confidence in the stability of the American economy.

“The markets don’t like uncertainty, and these tariffs are disrupting the status quo in a big way,” said Peter Tibbles, manager of international sales and trading at BOK Financial®. “Depending on how long the tariffs remain in place and how other countries respond, they could be an important determining factor in the state of our economy going forward.”

As the situation remains fluid, investors, businesses and consumers are longing for some foresight, said Tibbles.

Companies looking for countermeasures
While tariffs on imports may be intended to promote domestic manufacturing and purchases of American-made products, that shift could take years and, in the short-run, businesses will have to contend with the more immediate effects of tariffs, Tibbles explained. “U.S. businesses dealing with higher supply costs will have to decide how to address that,” he said. “They will either have to renegotiate prices with suppliers, absorb the cost increases themselves or pass higher costs on to their customers, which could spark inflation again.”

Alternatively, companies may start to explore lower-cost suppliers from non-tariffed countries, said Tibbles. But that option has consequences as well, as supply chain disruptions and decreased international trade can slow economic growth.

“Ongoing tariffs may also lead to higher unemployment as companies work to cut costs in other areas,” said Tibbles. “When you have slow growth combined with high inflation and high unemployment, you have the conditions for stagflation and potentially a recession.”

All of these factors play a role in the value of the dollar, which in turn can influence how much U.S. businesses and consumers are affected by tariffs. A weaker dollar makes imported goods even more expensive, but it can also make U.S. exports more attractive to foreign buyers and stimulate growth.

Overlapping international issues
In addition to the potential influences of tariffs, Tibbles noted how other issues abroad could impact foreign currencies and thus the purchasing power of the dollar. He explained:

• Earlier this month, the Euro surged on news of Germany’s work to reform the country’s longstanding “debt brake” and pass a billion-Euro spending bill for defense and infrastructure, meant to prop up the country’s struggling economy.
• Further strengthening the Euro is the pending ceasefire arrangement between Ukraine and Russia.
• Sweden, a significant weapons producer, may benefit from a militarization trend in Europe and experience a rise in the Krona’s value.
• As the security of the dollar, a traditional safe-haven currency, comes into question, other historically stable currencies including the Japanese Yen and Swiss Franc have strengthened.

“Until the turmoil surrounding U.S. trade policies subsides, investors may continue to shift into other currencies, which could contribute to further inflation and market volatility,” Tibbles said.

Metrics to monitor
Moving forward, U.S. businesses will be keeping a close eye on indicators that could portend the impact of Trump’s tariffs and whether the economy is headed for recession.

Asked which metrics might be the most telling, Tibbles said he’d keep a close eye on the consumer confidence index, as it provides insights into Americans’ near-term spending plans. His recommended dashboard also includes inflation rates and the unemployment rate, as well U.S. Gross Domestic Product (GDP). These correlated factors combine to paint a picture of economic health, which largely determines interest rates and the strength of the dollar.

“I expect that the tariffs on Mexico and Canada will be temporary until these countries do more to meet Trump’s demands on immigration and drug enforcement,” said Tibbles. “But tariffs on the EU and China—and their reciprocal tariffs on U.S. products—may be longer-lasting, and that may ultimately have a more meaningful impact on the lives of Americans.”