Trump trade mayhem to steepen yield curve and weaken US dollar

Longer-term prospects for greenback are weak due to de-dollarisation, as countries adjust supply chains and trade away from the U.S., writes Heng Koon How, head of markets strategy at Singaporean bank UOB.

On August 1, President Donald Trump finally made good his “promise” to finalize all the reciprocal tariffs that were initially announced back in April.

Most of Asia can heave a sigh of relief for landing a tariff rate at or below 20%. However, numerous question marks remain over these trade deals and what comes next.

The uncertainty, coupled with a potential slowdown in the global and U.S. economies in the second half of the year, explains why the U.S. yield curve may steepen further and in turn drive the greenback lower.

The larger damage to the U.S. dollar, however, will be seen in the long run as tariffs force countries to diversify their trade away from the U.S. to other economies. This will reduce the use of, and reliance on, the U.S. dollar in global trade, which will clearly be negative to its value.

Much uncertainty over what comes next for global trade

While U.S. Commerce Secretary Howard Lutnick insisted that after August 1, the tariff levels are finalized, many expect on-going negotiations in the months ahead.

The world’s most significant trade deal is yet to be agreed. After the third round of trade talks between U.S. and China, both parties were said to have agreed on a further extension of 90 days for the talks.

U.S.-China trade talks are complicated by many sensitive issues ranging from AI and semiconductor technology access for China, to the export of rare earth and critical minerals to the U.S. The negotiations will have important implications to China’s economic health and the economic outlook for the rest of Asia.

For now, if tariffs imposed on China from the first Trump administration and the Biden administration are included, the Peterson Institute for International Economics (PIIE) has calculated that the average U.S. tariffs on Chinese imports stands at 54.9%, while the average China tariffs on U.S. imports is at 32.6%. No matter how you read it, numbers in such a high range cannot be good for economic growth.

Besides this, trade deals with other key economies like India, Canada and Brazil have stalled due to non-trade related foreign policy and geopolitical issues.

For the deals that have been inked, many come with additional investment commitments to the U.S. – $350 billion from South Korea, $550 billion from Japan, and $600 billion from the European Union, for instance.

For each of these, the news has been met with disapproval and scepticism domestically. How will these investments be funded and implemented? Countries may need to find workarounds or reductions in these commitments, throwing their trade deals into jeopardy.

In addition, there are many questions how the tariffs on specific classes of goods are going to be implemented and stacked on. These include the “Section 232” sectoral tariffs on industries including automobiles, semiconductors and pharmaceuticals, and the “transshipment tariffs” for goods considered to have been transshipped to avoid duties.

Increasing worries of a second half global economic slowdown

Adding to this thick web of tariff-related uncertainties, the health of the U.S. and global economy have reached a critical fork in the road. Interestingly, the global economy, including both U.S. and Asian economies, did remarkably well for the first half of the year.

Due to the surge in exports, Singapore surprised with a strong above trend 4.2% GDP growth for the first half. Taiwan’s second-quarter GDP jumped by almost 8% as well.

As a result of China’s economic resilience, the International Monetary Fund (IMF) upgraded its 2025 GDP forecast for Emerging Market to 4.1% from 3.7% previously.

GDP numbers are unfortunately backward-looking and various authorities have warned that it is “payback” time next for the global economy as higher tariff rates hit.

In particular, the rush to front-load exports is likely over and Asian economies including China may feel the chill of a manufacturing slowdown next. Indeed, against expectations of a further recovery towards 50, China’s latest official manufacturing Purchasing Manager’s Index (PMI) disappointed with a pullback to 49.3 in July, suggesting that the manufacturing slowdown may have already started.

The U.S. economy also registered a stronger-than-expected 3% year-on-year growth for the second quarter, but an intense debate is brewing as to whether the negative impact of rising trade tariffs on the U.S. economy will now be more keenly felt in the second half of the year.

US Federal Reserve Chair Jerome Powell has said that so far, U.S. importers have been able to absorb most of the tariffs. But this is increasingly difficult going forward with the higher tariffs from August 1 – leading to higher consumer prices, reduced demand and a drag on the economy.

Fed cuts and de-dollarisation to drive greenback down

We believe the Fed will in fact resume its rate cuts at September’s Federal Open Market Committee (FOMC) meeting, after July’s disappointingly weak non-farm payrolls report numbers.

Effectively the average job gain over the past three months has now been revised to just 35,000, dropping to almost “stall speed” and signalling weakness in the labour market.

The resumption of rate cuts from the Fed will drive down short-term interest rates but longer-term rates like U.S. Treasury yields will stay sticky due to concerns over the unsustainable U.S. debt load. As a result, the US yield curve will likely steepen further which will add pressure to the dollar.

Beyond these pressures, the dollar will be driven down by longer-term structural trends.

Many economies are realising that higher trade tariffs from the U.S. are here to stay. To mitigate the risks, they will now need to restructure their supply chains and exports by diversifying their trade to other economies and by intensifying intra-regional trade with their immediate neighbors.

This structural change may well accelerate the de-dollarisation process and reduce the parking of trade proceeds in U.S. Treasuries, both of which are clearly negative for the U.S. dollar over the long run.

Some Asian currencies have been advancing against the U.S. dollar in recent months. For instance, the Singapore dollar has strengthened to just under 1.3 to the U.S. dollar. It is likely to stay in this range for now – the Monetary Authority of Singapore is likely to delay further easing of monetary policy until October this year or even January next year, when there is clearly evidence that the pre-tariff export front loading rush is over.

The US Dollar Index (DXY), which measures the U.S. dollar value against a basket of key global currencies, has now dropped below 100. We expect it to fall to towards 97 by end of the year and towards 95 by middle of next year.

Needless to say, due to strong safe haven demand, we stay long-term positive on gold, which is expected to rise further to $3,700 per ounce by the middle of next year.

U.S. President Trump will be long remembered for his promise to Make America Great Again – however, it is unlikely that he will be making the American dollar great again, anytime soon.