The only real comfort is that US inflation has not surged as a result of tariffs

There were plenty of major stories and market moves yesterday, but the most significant — and most impactful — was undoubtedly the sharp sell-off in the US dollar. It pushed the US Dollar Index to a four-year low and continues to drive gold and silver to fresh record highs this morning.

Trade and geopolitical uncertainty, tied to an increasingly unreliable American friend and ally, as well as growing concerns about what will happen to the Federal Reserve’s (Fed) credibility once Jerome Powell leaves office (it will fly out of the window), continue to weigh on the US dollar. Add to that the latest US consumer survey, which showed a sharp drop in consumer confidence, a marked deterioration in how households view the current situation, a decline in the share of consumers expecting income growth, and a steady rise in those saying jobs are hard to get. You get a pretty murky picture for the greenback and the two-speed US economy.

Still, this will hardly convince the Fed to cut rates today or in the coming months. Jerome Powell is likely to avoid political commentary at his post-decision speech today and keep the focus firmly on economic data to justify policy decisions.

That said, we all know the US President is waiting just outside the room — and anything he might say about the Fed’s decision, or about how much he dislikes Powell, would only risk making matters worse for the US dollar, much to the delight of gold and silver longs. But with or without buzzy headlines, the US dollar looks condemned to weaken.

The only real comfort is that US inflation has not surged as a result of tariffs. That is partly because importers built up stockpiles to buy time, but also because only around 20% of announced tariff threats have actually been implemented since November 2024, according to Bloomberg. In other words, only a fifth of tariff threats have materialised so far — giving the so-called TACO trade (“Trump Always Chickens Out”) some concrete data backing today.

This may help explain why Korean equities barely reacted when President Trump threatened to impose 25% tariffs on Korea, citing the lack of formal codification of last year’s trade deal. That agreement includes up to $350bn of Korean investment commitments in the US — a massive sum, especially with the won under pressure. South Korea has already signalled it may delay up to $20bn of planned US investment this year. Fury.

Political tensions aside, the Kospi hit fresh highs today, with SK Hynix continuing its “Free Solo” climb after reports it has become the exclusive supplier of memory chips for Microsoft’s new AI chip!

Elsewhere, after a year of trade tensions, former US allies appear increasingly keen to diversify. Last week, Canada signed a trade arrangement with China, easing rules on several sensitive areas, including Chinese EV exports. This week, Europe finalised a trade deal with Mercosur and another with India after two+ decades of negotiations. Funny how a common adversary can accelerate diplomacy!

Ursula von der Leyen dubbed the India agreement “the mother of all deals”. It eliminates more than 95% of tariffs on both sides and covers cars, industrial goods, wine, pasta, chocolate and other European exports for India’s 1.5bn consumers to enjoy without tariffs.

The mood among European investors would have been even better had LVMH not reported weaker sales on the same day. Still, the Stoxx 600 closed close to record highs, led once again by defence stocks, as Europe continues to ramp up spending on security and technology amid an increasingly strained relationship with the US.

Europe has strong players in defence. In tech, the challenge is far greater and will take years to address. That said, there are signs of progress: this week, the EU switched on parts of its home-grown secure satellite communications network, designed to reduce reliance on Starlink for sensitive uses. These efforts are likely to intensify as geopolitical risks grow, justifying investment in European defence and tech.

Speaking of tech, ASML — Europe’s largest technology company and the world’s sole supplier of the most advanced chip-making machines — reported earnings this morning. Results showed a modest beat on revenue and profit, and a significant upside surprise on bookings. Order intake reached around €13.2bn, roughly double expectations, underlining strong forward demand, particularly for EUV systems.

European futures are higher, while Nasdaq futures are leading gains among major indices, with ASML’s results boosting sentiment ahead of a busy US earnings calendar. Meta, Microsoft and Tesla report after the bell. For Microsoft, focus will be on Azure growth, AI-related product revenues and data-centre spending plans. For Meta, attention will centre on costs and monetisation of AI initiatives. I personally remain little convinced with Meta’s shift from social media to AI media, but hey... For Tesla, the spotlight is happily less on plunging car sales and more on dream... The pace of robotaxi expansion and the timeline for Optimus will matter more than actual numbers— though Elon Musk has already warned that production will be slow. Market reaction may once again hinge more on a single man's persuasion than on reality.