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The US dollar struggles to maintain strength due to doubts about long-term trade stability. Moreover, the national security probe into semiconductor imports adds further complexity. These actions signal tighter trade restrictions, which could slow global trade and affect US economic growth. As a result, major currency pairs like USD/JPY, EUR/USD, and GBP/USD show increased volatility.
Major companies are moving production out of China. Apple plans to shift iPhone output to India, while VTech will relocate all US-bound production by next year. These changes hint at a long-term decoupling of US-China trade. This structural shift may weaken the dollar over time if it leads to supply chain inefficiencies and higher import costs.
Tariffs Deepen Fiscal Strain and Weaken US Economic Outlook
The US economy faces growing pressure from rising tariffs and unsustainable debt. The federal debt now exceeds $37 trillion. Moody’s recently downgraded the US credit rating from Aaa to Aa1, citing widening deficits. The agency expects federal deficits to reach 9% of GDP by 2035, up from 6.4% in 2024.
This fiscal path is alarming. The Congressional Budget Office (CBO) projects public debt will surge to 172% of GDP by 2054. These estimates assume 10-year Treasury yields will fall below 4.0% by 2026, which now looks unrealistic. Yields have already tested 4.5%, and markets are pricing a breakout to 5.0%. Traders and global creditors are watching closely, especially after the Treasury’s rapid response to rising yields in April. China could leverage this vulnerability in ongoing trade negotiations.
The chart below shows that real retail sales have remained flat for the past three years. A decline from this level may develop due to tariff-driven inflation, spending cuts, and tax hikes, which could reduce consumer demand. As consumption slows, economic growth and investor confidence may weaken. Consequently, the US dollar could face continued downside pressure in global forex markets. However, this drop in the US dollar may benefit the gold (XAU) due to the strong safe-haven flows.
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