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Why the Dollar is unable to benefit from incoming trade deals.
The third significant new U.S. trade deal has been struck, this time with Vietnam, and more are expected ahead of the July 09 deadline.
Tariffs have hit the Dollar hard this year, and the prospect of an end to tariff uncertainty as these deals roll in should offer it some relief.
However, the Dollar barely budged in response to the Vietnam agreement, and the reaction sounds a warning bell to those expecting or wanting a material recovery in the under-pressure currency.
"It is not surprising that the dollar was unable to benefit from yesterday's news of the deal," says Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank. "The conclusion remains the same: import tariffs, even if they are no longer absurdly high, are likely to do more harm than good."
The deal sees the U.S. levy a 20% import tax on Vietnamese goods, while goods that come to the U.S. from other countries via Vietnam (mainly China) will be subject to a higher rate of 40%.
Vietnam agreed to cut all import tariffs.
On paper, this is a win for the U.S., but Nguyen explains it's still U.S. consumers who will suffer:
"In addition to numerous consumer goods, Vietnam exports coffee to the U.S., among other things. It is already questionable whether and how quickly the US can ramp up production of textiles, for example, which are imported from Vietnam.
"When it comes to coffee, that's where it ends, as the necessary climatic conditions simply do not exist (apart from in Hawaii)."
U.S. consumers will find it hard to substitute to domestically produced alternatives, meaning they will most likely have to subsidise a large part of the tariff-induced price increase.
This explains why, at its heart, tariffs are a headwind to the economy and the Dollar.
It also sends a signal that incoming trade deals are unlikely to boost the Dollar in a material way.