Threats of tariffs have come thick and fast since President Trump took office. But, so far, only one tariff has been levied: a 10% charge on imports from China. The market seems to think that Trump might be all bark and no bite. At least that might explain why the US dollar has gone from being the best performing G10 currency last year to the worst so far this year. But this assumption could prove premature.

Trump continues to make threats about tariffs. This week, we’ve heard that tariffs on pharmaceuticals, semiconductors and autos could be announced in early April and come in at an opening rate of 25%. Before that, it was the threat of reciprocal tariffs. But, as we’ve noted before, the marginal effect of each of these tariff announcements goes down. It is not that the market has heard it all before and has moved on to other topics. This would be an easy answer because negotiations over the war in Ukraine between the US and Russia appear to have stolen the limelight from tariffs. But no, the real reason that the market seems to be ambivalent about tariffs is because traders and investors seem to think that it is all bluster. That’s understandable.

Tariffs on Mexico and Canada have not gone ahead as first suggested and we dare say that most in the market believe that they will receive another let off when the one - month stay of execution expires on March 4th. In addition, many countries that face steep tariff increases on the basis of reciprocity with the US, like India, have seen politicians bending over backwards to make the concessions that could obviate US tariff increases.

Perhaps another factor here is that the one tariff that has been introduced so far, the 10% on Chinese imports, has gone ahead without too much fuss. When Trump was first in office in 2017 he spent much time of the time threatening China with tariffs and then drawing concessions out of the country, for an extra USD200bn of US imports over a two-year period, before acting. This time around, the tariffs have come quickly and, apparently, without any negotiation.

In short, tariffs, real or threatened, have been much ado about nothing in the eyes of the market; and here we are not just talking about the US dollar. But is the market right to be so dismissive? We remain sceptical. For a start, tariffs are only a threat if at least some go ahead. Trump will appear a laughingstock if he threatens tariffs against everyone and delivers none. And we do not think that Trump wants to be in this position even if abrogating tariffs draws worthwhile concessions out of other countries. So, some tariffs are likely and perhaps the pattern we’ve seen so far, in which China stands out as the most harshly treated will endure. Don’t forget, Trump did threaten 60% tariffs on China during the election campaign.

Right now, Steven Barrow, Head of Standard Bank G10 Strategy, suspects that the market is a bit too dismissive of the tariff threat and this could leave riskier assets open to a slump and the US dollar on the verge of a rise. “Our forecasts for the US dollar at the start of the year envisaged that US tariffs would deliver a temporary period of US dollar strength before the greenback gave ground; possibly ending the year as the worst performer within the G10. The question now is whether to give up on the call for short-term US dollar strength and just go with the longer-term view that the greenback will give ground”, said Steven Barrow.

While this seems tempting given the price action that we’ve seen so far, we are reticent to give it up just yet. One reason for this is that the ebb and flow of tariff sentiment could shift back in a more positive way for the US dollar. Another is that we have to consider what the actual impact of tariffs could be, which is separate from any pre-tariff expectations effect. What we mean here is that tariffs provide a fundamental reason for US dollar strength, irrespective of what the market might think about them and, in Steven Barrow’s view, that could still lift the US dollar in a short-term context. With this in mind, he still sees euro/US dollar slipping into a 0.95-1.0 range and sterling/US dollar to 1.15-1.20 before any longer-term rally can develop in these currencies.