Dollar Back On The Ropes As Trump Goes Tariff Wild

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As the dollar's slide pushes the yen higher, there's growing pressure on Ueda to stop hiking rates.“Economic data are weak, and Japan-US trade talks have made little progress,” says Stefan Angrick, Japan economist at Moody's Analytics.“The central bank is staying cautious, for now.”

The BOJ, he adds,“wants to see demand-driven inflation before tightening aggressively, but there's preciously little evidence of that.” Angrick also thinks the BOJ will slow the pace of shrinking its balance sheet. Instead of trimming bond purchases by 400 billion yen (US$2.8 billion) per quarter, as it has been doing, we expect a shift to cuts of just 200 billion ($1.4 billion) every three months.

Koichi Sugisaki, strategist at Morgan Stanley MUFG, is focused on how Team Ueda evaluates the negative impact from Trump's 25% auto tariff and“a recent rise in underlying inflation trend.”

Japanese inflation is rising at a 3.6% rate , nearly double the BOJ's 2% target. Along with raising inflation expectations, Trump's tariffs are also wreaking havoc with global bond markets.

On one level, a rising yen exchange rate could reduce the risk of imported inflation. On another, a plunging dollar would trigger an epic risk-off trade.

Paul Tudor Jones, who founded the $16 billion macro hedge fund Tudor Investment Corp, thinks a sharp dollar drop lies ahead as the Federal Reserve slashes interest rates. He thinks the dollar could be 10% lower within the next 12 months.

“You know that we are going to cut short-term rates dramatically in the next year,” Jones tells Bloomberg.“And you know that the dollar will probably be lower because of it. A lot lower because of it.”

Jones thinks Trump will replace Federal Reserve Chair Jerome Powell with an“uber dovish” leader who will bow to demands for lower rates. There's speculation that Trump might tap current Treasury Secretary Scott Bessent to lead the Fed.

Trump managing to name a loyal political appointee as Fed chief could backfire in Asia, the region that holds the largest stockpiles of US Treasury debt. Already,“there's clearly solid dollar selling,” observes strategist Kit Juckes at Societe Generale.

If the US ratcheted up tariffs , market anxiety would increase as global growth prospects wane.

Marcello Estevao, economist at the Institute of International Finance, notes that“global growth is losing momentum.” The IIF now forecasts global growth to slow to 2.7% in 2025 from 3.1% last year“amid structural policy shifts and fragmented recovery,” Estevao says.

Odds are that“US growth sharply decelerates, with fiscal expansion and tariff uncertainty shaping sentiment,” Estevao says. Consumer confidence indicators continue to deteriorate, while inflation expectations remain elevated. Business sentiment has turned negative as well.”

The Euro area, Estevao notes,“faces its own challenges in pursuing future growth, and Japan is gradually moving away from ultra-accommodative monetary policy. Both face muted growth constrained by divergent fiscal and monetary adjustments.”

China's growth , meanwhile,“remains moderate, meeting its growth targets but with narrowly focused composition, and stays heavily reliant on policy support, limiting global spillovers, growth is resilient overall, but capital allocation is increasingly selective and policy sensitive,” Estevao says.

In other words, the global financial system is not in a strong position to withstand Trump's next tariff onslaught. Or if credit rating companies follow the lead of Moody's Investors Service, which revoked Washington's AAA status in mid-May.

Moody's said America's ability to control its balance sheet is eroding year after year, forcing yields higher.“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” it said.

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”

Deutsche Bank strategist Jim Reid refers to Moody's being the last top rating company to yank away America's AAA“death by a thousand cuts” as Congress plays games with the debt ceiling and funding the government. And as Washington's debt burden heads toward the $37 trillion mark.