- The US president announced a 25% tariff on Japan and South Korea.
- Trump threatened to impose a 50% tariff on copper imports.
- Market participants will closely watch the FOMC minutes.
Gold extended this week’s declines as the dollar and Treasury yields soared on the likelihood of higher tariffs. The dollar reached a two-week high after Trump announced a 25% tariff on goods from Japan and South Korea, starting in August. Additionally, renewed tariff threats on other imports boosted the US dollar and Treasury yields.
Trump’s 90-day pause on reciprocal tariffs ends this Wednesday. So far, only a few countries, such as China, the UK, and Vietnam, have signed trade deals with the US. This means that most other countries might face higher tariffs soon. Already, the US president announced a 25% tariff on Japan and South Korea. The news immediately boosted Treasury yields due to the prospect of higher imported inflation.
Higher inflation would result in prolonged high interest rates that would support yielding assets like the dollar. On the other hand, non-yielding assets, such as gold, would suffer.
At the same time, there was optimism about increased pressure on countries to sign trade deals and avoid higher rates. After Trump’s announcement, both Japan and South Korea stated that they would continue negotiating before the hike in August. At the same time, the European Union is working hard to get a deal and avoid higher tariffs.
On the other hand, these countries might not sign deals on time. In such a case, higher tariffs would rekindle trade war concerns, boosting the safe-haven gold. At the same time, economic worries would increase demand for safe havens.
Trump also threatened to impose a 50% tariff on copper imports. Moreover, he warned of levies on pharmaceuticals and semiconductors.
Gold (Source: Bloomberg)
Last week, gold fell on Thursday after data revealed a resilient US labor market. Employers hired 147,000 new workers in June, compared to the forecast of 111,000. Additionally, the unemployment rate came in at 4.1%, missing estimates of 4.3%. The upbeat numbers eased worries about a rapid slowdown. Therefore, Fed rate cut expectations dropped, and the dollar and Treasury yields rose. Meanwhile, gold fell.
This week, market participants will closely watch the FOMC minutes, due to be released on Wednesday. Any clues about future policy will shape the outlook for rate cuts. Developments on tariffs will also determine how soon the Fed can lower borrowing costs.
