US: A new chapter for protectionism? - ING

A protectionist Trump administration has always been one of the main threats to the US dollar - especially for an economy carrying twin deficits and therefore heavily reliant on good relations with foreign investors for their financing, according to analysts at ING.

Key Quotes

“But that threat has shifted to reality this week given President Trump’s decision to uphold recommendations from the International Trade Commission (ITC) and slap anti-dumping tariffs on imports of washing machines and solar panels. This was the first use of Section 201 anti-dumping tariffs since 2002.”

“The ITC currently has close to 40 active investigations on anti-dumping complaints, suggesting plenty of scope to see more retaliatory tariffs from Washington this year. Welded stainless steel pipes from Korea and Taiwan could be next, according to the ITC’s website.”

“Can the US dollar serve as a trade tool?

Mnuchin’s comments have contributed to the dollar selling this week and raise questions as to whether the Trump administration's plan is to use the dollar as a trade tool. Typically, Republican administrations are worse for the dollar – especially during the second and third years of the four-year Presidential term. In practice, that sees Republican administrations shift from a ‘strong dollar policy’ embraced by the Democrats to a policy that FX rates should be freely determined by the markets.”

“Bottom line: Hard to put the 'weak dollar' genie back in the bottle

With investors wary of protectionism, it will be hard for Washington to put the weaker dollar genie back in the bottle. We are already targeting EUR/USD at 1.30 year-end (and 1.35 in 2019) on a benign dollar decline, with USD/JPY potentially moving to as low as 90 by end-2019 (base forecast currently 105). A malign decline - and the addition of a protectionist risk premium - may require us to cut our dollar forecasts further still.”