A customer at a grocery store in Palma, Mallorca, Spain.
Andrey Rudakov/Bloomberg via Getty Images
As economists ring alarm bells over the impact of President Donald Trump’s tariff policy on consumers and the U.S. economy, there’s a gaggle of Americans who may profit: tourists traveling abroad.
That is as a consequence of the impact of tariffs on the U.S. dollar and other global currencies. Economists expect tariffs imposed on foreign imports to strengthen the U.S. dollar and potentially weaken major currencies just like the euro.
In such a case, travelers would have more buying power overseas in 2025, economists said. Their dollar would stretch further on purchases like lodging, dining out and guided tours which can be denominated within the local currency.
“Tariffs, all else equal, are good for the U.S. dollar,” said James Reilly, senior markets economist at Capital Economics.
The U.S. dollar has risen amid tariff threats
The Nominal Broad U.S. Dollar Index in January hit its highest monthly level on record, dating to a minimum of 2006. The index gauges the dollar’s strength against currencies of the U.S.’ predominant trading partners, just like the euro, Canadian dollar and Japanese yen.
Meanwhile, the ICE U.S. Dollar Index (DXY) – one other popular measure of the strength of the U.S. dollar – is up greater than 3% since Trump’s election day win.
Trump on Thursday laid out a plan to impose retaliatory tariffs against trading partners on a country-by-country basis. Specific levies will rely upon the consequence of a Commerce Department review, which officials expect to be accomplished by April 1.
Meanwhile, Trump has imposed a further 10% tariff on Chinese goods. A 25% duty on all steel and aluminum imports is ready to take effect March 4. Further, a 25% tariff on Canada and Mexico may take force in March, after being paused for 30 days.
The Canadian dollar offers a recent example of the potential impact of a tariff, Reilly said.
On Feb. 4, when the Canadian tariffs were set to take effect, the U.S. dollar spiked to its highest level in a minimum of a decade against the Canadian dollar, before eventually falling back when Trump delayed the duties for a month.
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A trade war with China in 2018-19 during Trump’s first term also offers insight into the impact of tariffs on currencies, J.P. Morgan global market strategists wrote in October.
The Trump administration raised tariffs on about $370 billion of Chinese goods from a median of three% to 19% during 2018-19, and China retaliated by raising tariffs on U.S. exports from 7% to 21%, the J.P. Morgan strategists wrote.
While other aspects also influenced currency moves, trade policy uncertainty “tended to bolster the dollar,” J.P. Morgan reported. The DXY index rose as much as 10% during tariff announcement windows in 2018 and 4% in 2019, they wrote.
Why tariffs are good for the U.S. dollar
Tariffs — even the specter of them — can bolster the dollar relative to other currencies in a couple of ways, Reilly explained.
One key way is via rates of interest — specifically, the differential between one nation’s rates of interest and one other, he said.
Tariffs are generally viewed as inflationary, because the import duties are expected to boost consumer prices, a minimum of within the short term, economists said.
The Federal Reserve would likely keep rates of interest elevated to maintain a lid on U.S. inflation, which hasn’t yet fallen back to policymakers’ goal level after soaring within the pandemic era.
“We expect the USD [U.S. dollar] to stay strong within the short term, totally on the back of US inflationary policies and particularly tariffs,” Bank of America currency analysts wrote in a note Friday.
(Their evaluation was of “G10” nations: Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, Sweden, Switzerland, the UK and U.S.)
Based on available information around Trump’s retaliatory tariff plan, the common effective tariff rate on all U.S. imports would rise from lower than 3% now to around 20% — which might add about 2% to U.S. consumer prices and temporarily boost inflation to 4% in 2025, Paul Ashworth, chief North America Economist at Capital Economics, estimated Thursday.
On the flip side, other nations’ economies would likely suffer from the U.S. levies, Reilly said.
Take Europe, for instance.
Europe might export less to the U.S. in consequence, which might negatively impact the European economy, he said. That will make it more likely for the European Central Bank to chop rates of interest so as to bolster the economy, Reilly said.
A wider interest-rate differential would result from elevated U.S. rates of interest and lower European rates.
Such a dynamic would likely lead investors to maneuver money into U.S. assets — perhaps U.S. Treasury bonds, for instance — to hunt a better relative return, causing them to sell euro-denominated assets in favor of dollar-denominated assets, Reilly said.
On this case, higher demand for the U.S. dollar and lower demand for the euro may result in a stronger dollar, he said.
The euro and British pound sterling are especially sensitive to such interest-rate differentials, while emerging-market currencies are less so, Reilly said.
Will the dollar weaken later within the yr?
After all, there’s considerable uncertainty over how the U.S. would apply tariffs on other nations — and whether levies which were proposed would even take effect. Retaliatory tariffs from trading partners could blunt a runup within the U.S. dollar, economists said.
The dollar could weaken later within the yr if the world retaliates against the U.S. and these trade policies “take a toll on the U.S. economy,” Bank of America analysts wrote.
Indeed, most investors expect the U.S. dollar’s strength to peak in the primary or second quarter of 2025 — 45% and 24%, respectively, in response to a Bank of America survey conducted from Feb. 7 to Feb. 12. (The poll was of 52 fund managers from the U.K., Continental Europe, Asia and the U.S.)
Nonetheless, basically, most countries are more depending on the U.S. than the U.S. is on them for trade, Reilly said.
“In order that they cannot really retaliate to the identical extent the U.S. can,” he said.
