EUR/USD drifts lower below 1.0850 on US-EU tariff dispute
- EUR/USD loses ground to near 1.0835 in Friday’s Asian session.
- Trump threatens a 200% tariff on alcohol from the EU.
- Traders raise their bets that the Fed will restart its rate cuts in June.
The EUR/USD pair edges lower to around 1.0835 during the Asian trading hours on Friday. The Euro (EUR) weakens against the US Dollar (USD) amid an escalating trade war between the United States and the European Union. The German Harmonized Index of Consumer Price (HICP) for February and the preliminary Michigan Consumer Sentiment for March will be published later on Friday.
Late Thursday, US President Donald Trump threatened to impose a 200% tariff on wine, cognac and other alcohol imports from Europe. This measure came in response to the EU plan to impose tariffs on American whiskey and other products in April, which itself is a reaction to Trump's 25% duties on steel and aluminum imports that took effect on Wednesday. The latest twist of an escalating trade war exerts some selling pressure on the shared currency.
The European Central Bank (ECB) policymaker and Bundesbank President, Joachim Nagel, said that US tariffs on imported goods could tip Germany, Europe’s largest economy, into another recession, adding to the country’s ongoing economic struggles. "We are in a world with tariffs, so we could expect maybe a recession for this year if the tariffs are really coming," said Nagel on Thursday.
On the other hand, the weaker US economic data and concerns over a US slowdown might drag the Greenback lower and cap the downside for the major pair. Barclays analysts adjusted its forecast for US Federal Reserve (Fed) interest rate decisions, now seeing two quarter-point cuts in June and September. Previously, Barclays projected a single 25 basis points (bps) cut in June. Short-term interest-rate futures have priced in nearly a 75% odds of a quarter-point reduction to the Fed's policy rate by June, according to the CME FedWatch tool.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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