Tariffs, Trade Deficits, and Their Ripple Effects on US dollar, Gold and Oil

The United States faces a growing challenge with trade deficits exceeding $200 billion per quarter, including $78.2 billion in November 2024. The US trade balance is shown in the chart below. The US is the world’s largest debtor and navigates complex global financial and trade dynamics. These dynamics are causing significant shifts in commodity markets, including gold (XAU), the US dollar (DXY), and WTI oil (CL). The Trump Administration (Trump 2.0) has proposed increased tariffs to address these challenges, sparking debate over their potential impact.

How Tariffs Could Tighten Global Dollar Supply

The Trump Administration aims to reduce the US trade deficit by introducing import tariffs. While these were not part of the initial changes, they are expected to be implemented incrementally. While tariffs would curb imports, they also risk triggering retaliatory actions from trading partners. This could potentially reduce US exports and tighten the global supply of US dollars, as reduced trade means fewer dollars circulating in international markets.

These policies would strengthen the US dollar, making it more challenging for borrowers in the Eurodollar market to meet dollar-denominated debt obligations. The rising dollar could further increase demand, creating a vicious cycle for international borrowers and exposing them to higher repayment risks.

However, the initial impact on the US dollar is negative, with the US Dollar Index dropping from the strong resistance area of 110, as shown in the chart below. The imposed tariffs have created economic uncertainties and an expected inflationary environment. If the US dollar closes below 107 in January 2025, it will form a bearish hammer on the monthly chart, signaling a potential strong decline in the Dollar Index. The index is still trading within an ascending channel, and a bearish hammer within this channel has increased market uncertainty.

Impact of Financial Liquidity on US dollar

Financial liquidity in the US remains strong. The chart below shows that the Fed’s commercial bank reserves remain steady at $3.33 trillion, and Moody’s Baa corporate bond spread is at a low of 1.43%. This data indicates easy credit availability.

Moreover, the Chicago Fed National Financial Conditions Index is at -0.637, indicating a monetary policy environment similar to 2021.

Despite strong financial liquidity, Trump’s potential tariff policies could disrupt markets. A strong US dollar may prompt foreign central banks to sell US assets to defend their currencies. This could increase long-term Treasury yields (TNX), reduce liquidity, and pressure stocks and bonds. While the S&P 500 may initially rise due to strong liquidity, higher Treasury yields could act as a headwind in 2025.

This financial liquidity will likely impact commodities and digital assets. Gold is trading near record levels while the oil market continues to experience intense volatility. Additionally, Bitcoin reached a record high of approximately $109,300 before retracing to $103,000. Support of around $100,000 in Bitcoin would confirm strong liquidity in the financial markets.

The strong volatility in Bitcoin is confirmed by the significant resistance at the 2-year trendline around $110,000 and the formation of an ascending broadening wedge pattern at this resistance level, as shown in the chart below.

Oil Markets – Sanctions, Tariffs, and Dollar Volatility

The oil market rallied during the last week of December 2024 and early January 2025 due to strong sanctions on Russia. However, WTI oil encountered significant resistance around $80 and subsequently corrected lower. Similarly, Brent crude oil (BCO) was found resistant at $81.70. This correction marked a pivotal moment, with bearish pressure emerging following the Trump Administration’s tariffs. The strong volatility in the US dollar has further contributed to bearish pressure on oil prices by reducing global demand. However, lower oil prices may help ease inflation concerns in the short term.

The weekly chart for WTI crude oil shows a bearish market. This trend will likely continue until the key level of $80 is breached. The chart suggests further bearish confirmation if oil prices drop below the long-term pivotal range of $56–$66. This range has been at a critical level over the past four years. A break below this range could trigger strong bearish pressure, potentially driving oil prices below $35.

The interplay between surging liquidity and a strong dollar could lower Brent crude prices, while long-term inflation risks and geopolitical uncertainty add to market volatility. This uncertainty would expose oil markets to fluctuations in supply and demand dynamics.

Gold – Continuation of Bullish Momentum

Tariffs and financial liquidity are driving demand for gold as a safe-haven asset. This strong demand is reflected in the gold monthly chart, where the price broke the key level of $2,075 in 2024. This level served as the neckline of a cup-and-handle pattern.

The breakout above $2,075 has paved the way for higher prices, targeting $3,000. Price corrections in November and December 2024 have further reinforced a bullish setup for a surge to $3,000 in 2025. The strong performance in January 2025 indicates that gold is on track to reach this target.

EUR/USD – Key Reversal within Falling Wedge Pattern

The monthly chart for EUR/USD shows that a strong correction in the US Dollar Index following Trump’s inauguration has led to a significant rebound in EUR/USD. This rebound has created a favorable long-term outlook for the pair. If EUR/USD closes January 2025 above $1.05, it will form a bullish hammer candle, signaling a potential upward momentum. However, the pair remains in a sideways trend as long as it stays below the $1.12 level. A monthly close above $1.12 would confirm a strong bullish trend for EUR/USD and a bearish outlook for the US Dollar Index.

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