Trump Trade War Triggers Sharp Decline in US Dollar on Tariff Escalation

US President Donald Trump announced new tariff actions on imported steel and aluminium on Friday. He stated that the tariffs could double to 50% starting Wednesday, June 4, 2025. This move reignites tensions with key US trading partners, including China, South Korea, and Vietnam.

The announcement triggered an immediate market reaction. On Monday, shares of steelmakers in South Korea and Vietnam dropped sharply. The tariffs are raising fears of a broader trade war. Trump stated that China had failed to honour a critical minerals agreement. In response, China’s Commerce Ministry called the claim “groundless” and vowed to take forceful measures.

Moreover, Trump’s tariff policy has already faced legal challenges. A US trade court blocked some measures last week, citing executive overreach. However, an appeals court reinstated the tariffs the following day. The Trump administration also signalled its intention to pursue alternative legal channels to enforce the levies.

Trump Tariffs Trigger Sharp Decline in US Dollar and Boost Volatility

Last week, the US dollar rebounded from a significant support zone after talks with the EU resumed and a trade court blocked parts of Trump’s tariffs. However, the rally was short-lived, and following the announcement of new tariffs on steel and aluminium, the dollar resumed its decline.

This decline has pushed the dollar lower against other major currencies. EUR/USD has increased to $1.1450, GBP/USD to $1.3555, and AUD/USD to $0.65, while NZD/USD has increased to $0.6050. However, after hitting these levels, the market cooled off as the US Dollar rebounded with substantial volatility. On the other hand, gold (XAU/USD) has broken the key level of $3,360 on strong safe haven demand.

The forex market views these moves as a reaction to Trump’s trade escalation. Doubling tariffs on steel and aluminium could slow growth and fuel inflation. The US dollar has struggled and remains uncertain due to sudden shifts in tariff policy throughout 2025.

On the other hand, fiscal worries add to the bearish pressure on the US dollar. Investors are increasingly uneasy about the rising US deficit. Trump’s proposed tax and spending bill would add $3.8 trillion to the existing $36.2 trillion federal debt over the next decade. This has fueled a broad “Sell America” sentiment across stocks, bonds, and the dollar.

Weak US Economic Data Undermines Confidence Despite Easing Conditions

The chart below shows that the National Financial Conditions Index has dropped to -0.606, indicating a shift toward monetary easing. This suggests that financial conditions remain loose despite ongoing trade tensions and fiscal stress.

However, broader economic sentiment remains weak. If the impact of COVID-19 is removed, the University of Michigan’s index of current economic conditions has fallen close to its lowest level since records began in 1960. This data highlights growing consumer concerns.

On the other hand, labour market data shows early signs of softening. The chart below indicates that continued unemployment claims rose to 1.92 million on May 17. However, the unemployment rate remains at 4.2%, which is not a major concern. Economists typically raise alarms when the rate approaches 5.0%.

With rising tariffs, slowing growth, and weakening consumer sentiment, pressure on the US dollar and broader financial markets will likely persist. This pressure may increase safe-haven demand and support higher gold prices.

Trump Trade War Reshapes Major Forex Pair Trends

US Dollar Index Breaks Key Support Amid Tariff Escalation

The economic uncertainty triggered by the high tariffs has significantly impacted the US Dollar Index. The chart below shows that the index has broken the long-term support at 100.65 and moved toward the 96–98 region. The monthly close below 100.65 indicates continued bearish pressure. A break below 96 could trigger a decline toward the long-term support at 90.

USDCHF Breakdown Signals Deeper Decline on Dollar Weakness

The long-term breakdown in the US Dollar Index has also caused USD/CHF to break the key support level of $0.83. This breakdown has opened the door for a potential long-term move toward the $0.71 level. The shadow at the monthly candle of May 2025 indicates bearish pressure.

EUR/USD Surges Above $1.12 as US Dollar Weakens

The breakdown in the US Dollar Index has pushed EUR/USD above $1.12. A breakout from $1.12 has opened the door for a move toward $1.22. If the US Dollar Index breaks below 96 and moves toward 90, it could drive EUR/USD further toward the $1.22 region.