Before tariffs were announced in April by President Trump, in fact, even before Trump was elected as president, many analysts argued that both theory, and history suggested that the US dollar should rise following the imposition of punitive tariffs. Of course that did not happen. The US dollar initially plunged. But did that mean that the theory was wrong and history nonsense?

For a start, Steven Barrow, Head of Standard Bank G10 Strategy doesn’t believe that the slump in the dollar earlier in the year was some sort of rational reaction to tariffs. Instead, it seemed more of a moment when investors threw their hands up in the air, unsure of what all this tariff turmoil meant. When investors are confused like that, they tend to clam up and data suggests that one way they clammed up was by moving aggressively into the swaps market to convert open long-dollar positions into hedged dollar positions.

The BIS, for one, has documented this movement. So, many analysts regard the US dollar’s slump as probably a one-off that does not negate the idea that tariffs should, in theory, produce a stronger US dollar over time while history suggests that countries that have set tariffs in the past have, indeed, seen their currencies rise. The theory revolves around the fact that tariffs don’t determine trade balances.

The idea that you can tariff your way to a stronger trade position is bunkum as, indeed the US proved with its tariffs on China during Trump’s first term. The trade balance is a function of the gap between savings and investment and the US, as a high-investment and low-saving economy has tended to have a large trade deficit. This means that if tariffs produce any momentum at all towards a stronger trade balance it is offset by other factors that hurt trade and, number one on this list, is a stronger dollar. Now this clearly assumes that the tariffs themselves don’t materially change the savings/investment imbalance, and there is little reason to feel that they do.

In fact, if we take President Trump’s one big, beautiful bill, it looks as if government savings (or dissaving given that it is in deficit) will be worse while other factors seem to be lifting investment materially, notably the boom in AI-related activity. In theory, at least, this would seem to mean that the US dollar ought to rise even more. But does all of this make it a done deal that the US dollar will rise, so that it not only eliminates this year’s weakness, but goes on to appreciate much further over time?

If only things were this simple. For currencies are influenced by a multitude of factors that probably change all the time. The need for a stronger dollar to offset tariffs is just one factor influencing the greenback and others might be pushing in the opposite direction. For instance, the Fed is cutting rate while many others have either stopped cutting or seem to be close to the end of their cycles. Another headwind for the dollar is that this easing is taking place in the context of accusations that the Administration is politicising the Fed.

So, what’s the outlook? Will tariff theory lift the US dollar, or will other, more negative factors, weigh the US dollar down? At the moment it rather seems that the battle is about even as the dollar is very steady indeed with implied volatility falling to levels we’ve not seen in over a year. Yes, there is a bias towards a firmer dollar, but it is slight and we rather feel it will stay this way.

In sum, Steven Barrow sees the plunge in the greenback earlier this year as a one-off hedge-related adjustment and not part of some sort of substantial and rapid slide that will resume again in coming weeks or months, once this period of stability is broken. In fact, if there is a risk of a more aggressive move in the US dollar soon he suspects it lies more in the direction of strength than weakness as the theory – and history – of tariffs produces the strength in the US dollar that we had expected in the first place.