US Poised to Sneeze. Brace for Flu Elsewhere.

Don't be fooled by the rally in sterling and the euro — the biggest for the single currency in almost a decade. What their sudden strength reveals more is the angst that has sent dollar assets tumbling than any outburst of optimism. But if the US economy takes a nosedive from Donald Trump's live experiment on trade, then there is going to be a much bigger reordering of the global economy.

It's important not to confuse gains in the euro, for instance, as a sign of economic strength. If European exporters face extra levies of 20%, then the last thing they need is a stronger currency, which makes their products more expensive in the US. This all points to weaker global growth. Tariffs have a horrible tendency to import inflation and export deflation - but the downward growth effect is unavoidable everywhere.

Deutsche Bank AG analysts warn of “a self-fulfilling unwind of extreme US asset over-weights from countries that have exported capital to the US over the last decade.” The twin imperatives of the US administration are to weaken the value of the dollar (not its usage) and lower US Treasury bond yields. Those goals are in motion, but they come with an unpredictable cost to growth and equity values. If the US stock market or consumers turn tail, this isn’t going to be a US problem alone and will only make exporter conniptions metastasize. Having a sudden influx of monies returning from across the Atlantic can make things worse, not better, if the euro area’s export-led economy stalls. Swiftly changing course isn’t a recognized attribute of the European Union.

All the European Central Bank and its global peers can do is see that domestically driven inflation is no longer their biggest worry. Exporters are facing a wall of pain. Plunging growth prospects have a eviscerating effect on prices and will directly impinge on labor demand and thereby costs. Talk of stagflation is way too premature, but the perfect conditions for it to bed in are present.