Strategic implications of “Liberation Day”

Summary

Liberation Day in the United States came with extremely protectionist and inward-looking tariff policy aimed at just about all U.S. trading partners. In this report, we outline some of the more strategic implications of Liberation Day and developments we will be paying close attention to going forward.

Strategic implications of “Liberation Day”

Liberation Day tariffs will provide perhaps the sternest test of our view that markets are experiencing “tariff fatigue.” Liberation Day tariffs were extremely protectionist, and while global equity markets are down sharply this morning, FX markets are not having the same “risk off” reaction. Just looking solely at FX market performance since Liberation Day announcements, one might think the Trump administration lifted all tariffs and provided a warm embrace to globalization and all U.S. trading partners. G10 currencies are rallying across the board, while the most risk-sensitive currencies in the emerging markets are, with only a few exceptions, stronger. In our last two International Economic Outlook publications we have discussed the possibility of FX markets settling into “tariff fatigue”, where market participants have digested the fact that tariffs are here but just shrug them off. Also, “tariff fatigue” in the sense that tariffs are creating a dynamic where post-COVID U.S. exceptionalism has finally run its course. Maybe not a perpetual end to U.S. exceptionalism, but at least for the time being, as U.S. policy uncertainty is elevated and until the economic impact becomes clearer. We have also highlighted that tariff fatigue is causing other economic and policy factors to re-emerge as currency market drivers—such as the possibility of more dovish Fed monetary policy or more expansive Eurozone fiscal policy. While we forecast dollar strength going forward, our tariff fatigue view has played a role in our view that the rise in the U.S. dollar will not be as pronounced as we previously envisaged. While foreign currency strength immediately following Liberation Day is perplexing, the next few weeks and months will be a good test of whether tariff fatigue is still taking hold. Looking ahead, even if tariff fatigue does appear to be sinking in, we still struggle with the idea that U.S. dollar should outright weaken. In that sense, we remain comfortable with our view that the greenback should strengthen in the current climate, but may adjust the overall magnitude of dollar strength lower again if we observe stronger signs of tariff fatigue.

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