As economists voice growing concerns about the effects of President Donald Trump’s tariff policies on consumers and the U.S. economy, American tourists traveling abroad might find themselves benefiting. This strange twist comes from the impact these tariffs have on the U.S. dollar and other global currencies. Economists anticipate that tariffs on foreign imports will bolster the U.S. dollar’s value while possibly weakening significant currencies like the euro.
Such currency dynamics could translate into increased purchasing power for U.S. travelers venturing overseas in 2025. Their dollars might go further when paying for expenses such as hotels, meals, and guided tours, which are priced in local currencies.
“Generally, tariffs tend to strengthen the U.S. dollar,” notes James Reilly, a senior markets economist at Capital Economics.
### The Dollar’s Climb Amid Tariff Talks
To illustrate, consider the Nominal Broad U.S. Dollar Index, which hit a record monthly high in January, based on data recorded since 2006. This index measures the dollar’s performance against the currencies of key U.S. trading partners, including the euro, Canadian dollar, and Japanese yen.
Meanwhile, the widely used ICE U.S. Dollar Index (DXY) has climbed more than 3% since Trump’s electoral victory.
On a recent Thursday, Trump outlined plans for retaliatory tariffs against trading partners on a country-by-country basis, with specific duties being determined following a Commerce Department review expected by April 1.
Also in the mix are a 10% additional tariff on Chinese goods and a 25% duty on all steel and aluminum imports set to roll out on March 4. Moreover, a potential 25% tariff on Canadian and Mexican imports might come into effect in March, following a temporary pause.
An instance illustrating the possible impact of tariffs is the reaction to Canadian tariffs proposed for February 4. On that day, the U.S. dollar soared to a decade’s high against the Canadian dollar before receding when Trump decided to postpone the tariffs for a month.
Additionally, looking back at the 2018-19 trade tensions with China during Trump’s first term provides insight into how tariffs can influence currencies. J.P. Morgan’s global market strategists highlighted how tariffs on $370 billion worth of Chinese goods increased from around 3% to 19%, prompting China to increase tariffs on U.S. exports from 7% to 21%. These events, combined with other factors, created an environment that often strengthened the dollar, with the DXY index rising by up to 10% during critical announcement periods in 2018, and by 4% in 2019.
### Understanding Why Tariffs Can Boost the Dollar
Reilly explains that tariffs, including just the threat of them, can fortify the dollar compared to other currencies through some mechanisms.
A significant factor is the difference in interest rates between countries.
Tariffs are often perceived as inflationary since they tend to push consumer prices higher, at least in the short term, according to economists.
This potential inflationary pressure might prompt the Federal Reserve to maintain higher interest rates to control U.S. inflation, which has not yet returned to the targets set during the pandemic.
“We anticipate a strong USD in the short term, largely due to U.S. inflationary strategies and tariffs,” stated analysts from Bank of America in a note last Friday.
The analysis was directed toward “G10” countries, including the likes of Belgium, Canada, and Japan, among others.
From what is known about Trump’s retaliatory tariff plans, Paul Ashworth, Chief North America Economist at Capital Economics, estimated that the average effective tariff rate for all U.S. imports might rise to about 20% from less than 3%, potentially pushing U.S. consumer prices up by around 2% and temporarily driving inflation to 4% in 2025.
### Impact on Other Economies
Reilly points out that U.S. tariffs could have adverse effects on other countries’ economies.
Taking Europe as an example, reduced exports to the U.S., spurred by tariffs, could negatively impact its economy. In response, the European Central Bank might cut interest rates to bolster economic activity.
The resulting interest-rate gap, with higher rates in the U.S. and lower rates in Europe, might prompt investors to channel their money into U.S. assets, such as Treasury bonds, in search of superior returns. This movement would likely prompt selling euro-denominated assets in favor of those valued in dollars, strengthening the dollar further.
This dynamic is particularly impactful on the euro and British pound sterling, whereas emerging-market currencies are somewhat less affected.
### Looking Ahead: Potential Shifts in the Dollar
It’s important to acknowledge that considerable uncertainty lingers around how the U.S. will implement tariffs on other nations and whether the suggested levies will even materialize. Partner nations might retaliate, which could mitigate the surge in the U.S. dollar’s value, as economists speculate.
If global reactions counter the U.S. moves, the dollar might weaken later in the year, particularly if economic tolls mount due to these trade policies, caution Bank of America analysts.
Most investors expect the U.S. dollar’s strength to reach its peak by the middle of 2025, with around 45% believing it will happen in the first quarter and 24% in the second, according to a poll conducted by Bank of America from February 7 to 12, involving 52 fund managers from varied regions like the U.K. and Asia.
Despite these possibilities, Reilly states that generally, most countries are more reliant on the U.S. for trade than the reverse.
“So their ability to counter with tariffs isn’t as robust as that of the U.S.,” he concludes.
