The much-anticipated summit between the US President and his Russian counterpart did not have a significant impact on the US dollar, despite the generally negative reporting in its aftermath (see the article below). While diplomatic developments are likely to remain in focus in the coming days, the central bank meeting in Jackson Hole at the end of the week is expected to have a greater impact on the currency market. Who will ultimately pay the higher US tariffs? Officials currently calling for interest rate cuts seem to be focusing on the idea that US tariffs will not lead to increased inflationary pressure, or that any such pressure would be transitory, Commerzbank's FX analyst Michael Pfister notes.

Importing US companies might absorb the higher tariffs

"Foreign companies could lower their prices for US exports of their own accord in order to remain competitive. This would be the best option for the US dollar, as it would not reduce its purchasing power in the US while providing the US government with more revenue thanks to the tariffs. Although some reports suggest that Japanese car exporters have reduced their prices, the recent alarmingly high increases in producer prices for July suggest that this will only be the case to a limited extent."

"Secondly, importing US companies could absorb the higher tariffs by reducing their margins in order to continue offering goods at the old price in the US. This would probably be slightly worse for the US dollar, as it would likely hurt US companies' share prices. However, this could be offset, at least in part, by interest rate cuts from the Fed. This has not yet been reflected in companies' reports in the second quarter, but it will probably take a while for such developments to affect margins. Nevertheless, it will be challenging to avoid passing on the US tariffs, particularly in sectors under pressure due to already tight margins."

"The tariffs could be passed on to US consumers. This would be the most challenging scenario for the US government, which is why it is trying to suppress such reports. Remember the announcement by a major US retailer in April that it intended to pass on the tariffs, but subsequently backed down under pressure from the US government? This would not only be the most challenging scenario for the government, but also for the US dollar. After all, it would increase inflationary pressure and probably cause consumers to reduce spending. Since US consumers are the main drivers of US growth, this would likely increase concerns about the real economy."