US Dollar: USD/GBP Drops as Trump Imposes Tariffs – Here's Why

March 4, 2025 - Written by David Woodsmith

STORY LINK US Dollar: USD/GBP Drops as Trump Imposes Tariffs – Here's Why

The US dollar dropped to new 2025 lows on Tuesday after tariffs were imposed on Canada, Mexico and China.

Many analysts expected the USD to rise on tariffs, but the situation is different to 2018.

There could be a significant impact on US growth and consumer spending, which will weigh on yields and the USD.

Volatility remains high on Tuesday as Trump’s tariffs on Canada, Mexico, and China came into effect, with no last-minute deals. The new measures include 25% duties on Canadian and Mexican imports and an additional 10% tariff hike on Chinese goods, impacting an estimated $1.5 trillion in annual US trade, according to Bloomberg.

In response, Canada has introduced 25% tariffs on select US exports, while China has imposed tariffs of up to 15% on American products, further escalating trade tensions. Stocks are down heavily again and Tuesday’s -1.5% fall in the S&P500 follows on from a –1.78% drop on Monday. This has taken it to new 2025 lows and into the range of the election day. The US dollar is also weak and EURUSD is +0.45% at 1.053.

The drop in the dollar has some analysts scratching their heads – the expectation was that tariffs would be USD positive as the countries targeted would likely weaken their currencies in response. Tariffs are also inflationary and should lead to higher yields and less chance of rates cuts. However, the immediate effect looks likely to slow growth and dampen consumer spending which has actually dropped yields and the dollar. Here's ING to explain why this time is different and taking many traders off guard:

“During President Trump's first term in office, we felt the sequencing of tax cuts (late 2017) and then tariffs (March 2018-August 2019) were key reasons for a strengthening dollar. In other words, the US economy had some fiscal support before tariff wars were waged. What seems to be the case today is that Washington is engaging in protectionism very early in its new administration without the domestic back-up. This means that while the US is now broadening its tariff regime to Canada and Mexico, weak domestic US activity has seen the market reprice to 75bp rather than 50bp of Fed easing this year. This is preventing the dollar from strengthening on the tariff news.”

The tariffs only came into effect today but there have already been some softer data readings. Monday’s ISM manufacturing survey came in weaker than expected at 50.3, barely above the 50-mark that separates expansion from contraction.

New orders (48.6) and employment (47.6) both slipped into contraction territory, signaling softening demand, while Prices Paid surged 7.5 points to 62.4, the highest level since June 2022, highlighting rising cost pressures. In other words, everything was moving in the wrong direction. This follows on from concerning consumer data in January. This was before tariffs had an effect, but concerns over their impact and rising inflation dampened sentiment and spending. Retail sales contracted 0.9%, and February’s University of Michigan survey revealed inflation expectations at 3.5%, the highest since 1995, while consumer sentiment fell to 64.7 from 71.7.

The Conference Board’s Consumer Confidence Index also dropped 7 points to 98.3, with the Expectations Index falling below 80, a level historically signaling recession risks. While surveys can be politically influenced, hard data confirms the trend, as consumer spending declined for the first time in nearly two years, compounding weak retail sales.

The US consumer is critical for the economy and with some companies already warning of price hikes due to tariffs, the situation could get worse in the coming months. This will weigh on the US dollar and the odds of a May cut have risen to 40%.

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TAGS: American Dollar Forecasts