The impacts on the US dollar relate to the prospect of Fed easing, the summit between presidents Trump and Putin on Ukraine, and questions around the legality of US tariffs.

This triple whammy of pain for the US dollar relates to the prospect of Fed easing, the summit between presidents Trump and Putin on Ukraine, and questions around the legality of US tariffs. It is already clear that the economic mood music in the US has turned down. It is not just the very weak payroll data for July and the downward revisions to May and June that are to blame. A raft of data has been deteriorating for some while. This should not be a huge surprise; tariffs are supposed to weaken economic activity and lift inflation.

However, all thoughts that the US could somehow escape these twin evils is now being undone, starting with weak growth and probably going on to higher inflation. And herein lies the rub because, if the Fed does start to ease policy soon, it will do so into a tide of rising prices. That not only means lower nominal US rates, but lower real (inflation adjusted) rates and it is these that are crucial when it comes to currencies. Of course, the Fed could leave policy unchanged given the rising inflation threat, but that could imperil the economy. In short, the Fed is between a rock and a hard place, and so is the dollar.

Could any such pressure on the greenback be exacerbated by an imminent meeting between President Trump and President Putin over Ukraine? Steven Barrow, Head of Standard Bank G10 Strategy thinks so. For while the war in Ukraine will not be concluded by a peace deal, it probable that any such summit between the two parties will yield ‘positive’ results. Indeed, Steven Barrow is pretty sure that the summit would not go ahead unless aides to both sides felt there was a very strong chance of some sort of agreement.

Now any such deal might not amount to much. Putin’s offers in the past have fallen very far short of what Trump – and Ukraine – wants, and that might happen again. But if there is any sense at all that a proper peace deal, or even just a temporary cessation of fighting, is possible, we could see the US dollar slump and the euro, in particular, surge.

The euro was destroyed when Russia launched its attack on Ukraine in February 2022. It was trading around the 1.12 level against the dollar just before the invasion and slumped to a low of 0.9540 just seven months later. Admittedly this collapse reflected the huge damage to the euro zone’s terms of trade arising from the surge in oil and gas prices caused by the war. Fast forward to today, Steven Barrow doubts anybody would expect a similar-sized collapse in energy prices if a peace deal seems possible. Nonetheless, he still feels that there’s enough here that could help push euro/dollar into the 1.20-1.25 range.

Regarding tariffs, we await the outcome of appeals that the Trump Administration has lodged against the International Court of Trade over its decision to rule tariffs illegal, and there are also a number of other such decisions in district courts that Trump is trying to get overturned. The result of this could come very soon.

Steven Barrow said that the Administration’s appeal would fail. If so, headlines about ‘illegal’ tariffs will hit the wires, and there will even be talk that the Treasury could have to pay all the tariff money back. No doubt the Administration’s lawyers would appeal any such ruling and that would send it to the Supreme Court who, would not only take many, many, months to rule, but the appeal would keep the tariffs in place for now. On top of this, many will expect the Supreme Court to side with the President in the same way as it has until now on other issues.

In short, tariffs are likely to stay. But that won’t prevent a possibly nervy period for the Administration and the market. For what would be left of Trump’s policy if the Supreme Court were to rule the tariffs illegal? It hardly bears thinking about. But the US dollar bears may well give it some thought.