US trade war squeezes manufacturing as dollar weakens

The dollar slipped to $1.3542 against sterling following the release of a disappointing US manufacturing survey, which signalled a significant drop in production levels. Monday’s data has pushed the currency towards a three-year low amidst continuing unease over President Donald Trump’s trade policies.

The Institute for Supply Management (ISM) purchasing managers’ index, a key indicator of the manufacturing sector’s health, fell to 48.5% in May. Any reading below 50% signals contraction, and this marked the third consecutive monthly decline in output. The survey revealed that uncertainty surrounding tariffs has further dampened profitability, as noted by respondents including a major paper producer, who warned of potential retail shortages for both do-it-yourself and professional goods.

Adding to the pressure, a chemicals manufacturer reported that suppliers are passing through the full cost of tariffs, squeezing margins across the board. Many businesses have been struggling to adjust to rapid shifts in trade policy as tensions between the US and China remain unresolved. This comes after Trump raised steel tariffs to 50% last Friday, doubling the previous 25% levy. His assertion that China has “violated” the terms of a fragile 90-day trade truce has only added to the broader uncertainty.

The dollar’s dip on Monday was mirrored across other currencies, with the greenback shedding 0.5% against a basket of global counterparts. Investor apprehension has also driven up yields on US Treasuries, interpreted as a sign of growing concerns over the government’s financial outlook. In April, Trump’s aggressive “liberation day” tariff blitz led to repeated sell-offs of the dollar and introduced volatility into the markets.

The Trump administration continues to defend its economic policies amidst criticism. Treasury Secretary Scott Bessent reassured markets over the weekend that the US would not face a debt default, despite mounting concerns about how the president’s tax cuts and ambitious spending plans will impact fiscal sustainability. Bond market instability, highlighted by major financial institutions, underscores the tension between national debt pressures and efforts to maintain investor confidence.

With no clear path to policy stability, manufacturers and investors are bracing for what could be a prolonged period of uncertainty, weighing heavily on production, trade, and currency valuations.