REFILE-Reuters Econ World: Central bank decoupling

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By Carmel Crimmins

Feb 6 - It’s been a head-spinning week, I think we can all agree. U.S. President Donald Trump’s on-off tariffs on Canada and Mexico have some investors hoping that the potential trade sanctions are just a bargaining tactic. Let’s see.

What does Trump want? That's the question everyone's asking and the topic of this week’s Econ World podcast. Listen here to Reuters Economics Editor Dan Burns on what a threatened trade war means for business and governments. Plus, we hear how the latest escalation in trade tensions is reverberating in Beijing.

While we await Trump’s next move, the trade tensions are helping drive a clear divergence in policy among the world’s biggest central banks. The Bank of England became the latest monetary authority to cut interest rates. Like the European Central Bank and the Bank of Canada, it’s also holding the door open to further reductions amid concerns that a trade war with the United States will hit growth.

The Federal Reserve, meanwhile, is standing pat. Its stronger economy gives it more breathing space to assess the impact of Trump’s words and actions. Models compiled by the Peterson Institute for International Economics, a Washington-based think tank, concluded that while the imposition of tariffs would see the U.S. itself take a hit to growth, it would suffer less than any of its targets.

Sterling slid after Thursday's rate cut, a sharp reduction in BoE growth forecasts and its warning that inflation will rise “quite sharply” this year. Monetary easing inevitably weakens currencies against the U.S. dollar, offering some relief for foreign exporters to the United States if tariffs are implemented. ECB board member Piero Cipollone flagged that impact in an interview with Reuters on Thursday.

Indeed, more currency strategists now expect the euro to fall to parity with the dollar, as you can see from the graph below. The rampaging dollar is also driving a jump in corporate FX hedging, a move that some analysts said points to increased conviction that Trump’s tariff plans will help keep the U.S. currency higher for longer.

Just the threat of tariffs has businesses and consumers rushing to buy foreign-made goods like finished metals and computers. That was clear in the trade figures out this week which showed a sharp jump in the U.S. trade deficit in December.

A strong U.S. dollar makes it more expensive for other countries to buy American products but that might not be the reason Tesla is posting lower sales in parts of Europe. The automaker sold fewer vehicles across five European countries in January, including the United Kingdom and France, as competitors with newer models gained on the electric vehicle maker and polls show public opinion souring on CEO Elon Musk.

A late January survey conducted by EV review website Electrifying.com showed that 59% of British owners of EVs, and those intending to buy such a vehicle, said Musk's influence would deter them from buying a Tesla.

As always, I'd love to hear from you. Find me on LinkedIn.

The headlines

• Trump says Israel would hand over Gaza after fighting, no US troops needed

• US government workers face buyout deadline as Trump presses ahead with overhaul

• Exclusive: Trump team considers demanding WHO reform, including American in charge

• Exclusive: Ukraine sees marked improvement in accuracy of Russia's North Korean missiles

The chart

The greenback has been on a rampage since late September, soaring over 7% against a basket of major currencies and hammering the euro down to just a whisker away from parity.

Nearly one third of currency strategists polled by Reuters now expect the euro to fall to parity with the dollar or below.

The podcast

“ It is certainly a wider use of tariffs as a club to force negotiations around a range of issues, than we've seen in the modern U. S. presidential era.”

Americas Economics Editor Dan Burns on this week's Reuters Econ World podcast.

On this week's show, we go deep on Trump's tariffs and what the president wants. Listen here.

The real world

• Damascus: Syria’s Islamist rulers overhaul economy with firings, privatization of state firms

• New York: Why Trump's repeal of a trade loophole will hurt low-income and minority Americans

• Jerusalem: Trump's Gaza 'Riviera' echoes Kushner waterfront property dream.

The week ahead

• Feb 7: U.S. Non Farm Payrolls

• Feb 12: Fed Chair Jerome Powell speaks before the House Financial Services Committee

• Feb 12: U.S. inflation data