Asian shares dithered and the dollar edged higher on Monday after U.S. President Donald Trump warned more tariffs were imminent including on steel and aluminium, an inflationary move that could limit the scope for rate cuts.
Speaking to reporters on Air Force One, Trump said he would announce on Monday 25% tariffs on all steel and aluminium imports into the U.S., and reveal other reciprocal tariffs on Tuesday or Wednesday.
The comments came just after German Chancellor Olaf Scholz said the European Union was ready to respond “within an hour” if the U.S. levied tariffs on European goods, highlighting the risks of an escalating trade war.
China’s retaliatory tariffs on some U.S. exports are due to take effect on Monday, with no sign as yet of progress between Beijing and Washington.
“These could be a strategic negotiating tool for President Trump or the beginning of a prolonged trade war,” said Stephen Dover, head of the Franklin Templeton Institute.
Nearly half of U.S. imports serve as inputs for domestic companies, meaning businesses will either have to pass higher costs to consumers, absorb lower margins or adjust supply chains entirely.”
Analysts assume currencies from those countries targeted by Trump will tend to fall against the dollar to help compensate in part for the taxes, keeping their exports competitive.
Tariffs could also put upward pressure on U.S. inflation and further limit room for the Federal Reserve to ease policy.
Markets had already scaled back expected rate cuts this year to just 36 basis points, from around 42 basis points, following an upbeat payrolls report on Friday.
Fed Chair Jerome Powell is due to appear before the House of Representatives on Tuesday and Wednesday and the impact of tariffs on policy is sure to be a hot-button issue.
His Wednesday testimony will also follow consumer price data for January which might hint at early pressure given anecdotal evidence of firms raising prices in anticipation of the taxes.
A survey of consumers out on Friday showed a sharp rise in inflation expectations for the year ahead, though the longer-term outlook was steadier.
SOURCE; REUTERS
