US firms say Trump trade war is hitting production as dollar nears three-year low | Trump tariffs

A contraction in US manufacturing, as indicated by the ISM purchasing managers’ index falling to 48.5% in May, has intensified concerns about the impact of President Trump's trade policies, pushing the dollar near a three-year low against the Sterling. Manufacturers cited tariff-related uncertainty as weighing on profitability, with some suppliers passing tariff costs directly to them. This development follows Trump's recent tariff increases on steel and accusations against China regarding the trade truce, further pressuring the dollar and raising investor anxiety about the US government's debt sustainability, despite assurances from Treasury Secretary Scott Bessent.

Analysis

US manufacturing activity has contracted for a third consecutive month, evidenced by the ISM purchasing managers’ index falling to 48.5% in May, signaling a deterioration in the economic outlook directly attributed to persistent trade policy uncertainties. This downturn, highlighted by manufacturers' reports of tariff-related profit pressures, suppliers passing through full tariff costs, and potential retail shortages, has contributed to the US dollar nearing a three-year low against sterling at $1.3542 and declining approximately 0.5% against a broader currency basket. Escalating trade tensions, including President Trump's increase in steel tariffs to 50% and accusations that China violated a trade truce, compounded by domestic legal challenges to tariff impositions, amplify market instability. Consequently, rising US Treasury yields suggest growing investor apprehension regarding the US government's debt sustainability, despite assurances from the Treasury Secretary against a default. The overall market sentiment is strongly negative, with a pessimistic tone and a significant market impact score of 0.7, reflecting deep concerns over these developments.

Key Decisions for Investors

• Investors should exercise caution regarding US dollar exposure and may consider strategies that could benefit from its continued weakness, particularly against sterling.
• Scrutinize investments in US manufacturing sectors heavily reliant on international supply chains or directly exposed to tariffs, as profitability and output are demonstrably under pressure due to current trade policies.
• Closely monitor movements in US Treasury yields as an indicator of shifting risk perceptions concerning US sovereign debt and the broader economic impact of ongoing trade disputes.
• Given the high degree of trade policy uncertainty and its direct economic consequences, consider portfolio diversification or employing hedging strategies to mitigate potential downside risks stemming from tariff impacts and currency fluctuations.