US Dollar rises as Trump revives tariff threats

Not wholly unexpected, mind you, the dollar surged against every major currency following remarks from President Donald Trump and his Treasury Secretary, reigniting concerns that the hiatus from tariff discussions was temporary, with policies still simmering on the back burner. The currencies most sensitive to risk, particularly those viewed as proxies for China within the G-10, faced declines, while the euro weakened amidst speculations that the EU might be next in the tariff crosshairs. Concurrently, traders dumped the yen to hedge against potential US inflation spikes and rising US treasury yields.

This flurry of activity was triggered by a Financial Times report suggesting that Scott Bessent, newly appointed to the Treasury Department, supports a phased introduction of universal tariffs on US imports, beginning with an initial rate of 2.5%. Amplifying market anxieties, President Trump voiced considerations for imposing tariffs on a broad spectrum of imports, from steel to semiconductor chips, hinting at a preference for significantly higher rates than the initial 2.5%.

Described as a "moderate" stance within the new Trump administration, the proposed 20% tariff, to be implemented gradually over eight months at a rate of 2.5% per month, prompts speculation among FX traders about what the "extreme" position might entail. Crucially, they are also pondering what concessions might halt the tariff implementation that the rest of the world would need to offer. Here is the issue: Bessent’s strategy seemingly allows more time for exporters and importers to respond, which could trigger an immediacy of importing/exporting goods to preempt higher future costs. Yes, it’s a bit of a twister.

Navigating these turbulent financial waters, we started the week advocating for maintaining long positions on the dollar. However, as events unfold, it's becoming evident that we might be in for a rougher ride than initially expected. The central question now is: What has the market genuinely priced in regarding the proposed tariff escalations?

Given the complexities of these tariff discussions, it's essential to consider both the potential positive and negative outcomes. On the positive side, we must explore what concessions might need to be made to halt or reduce the tariffs. What are the negotiating levers and economic pressures that could lead to a de-escalation?

Conversely, the negative tail risks include scenarios in which tariffs escalate to their maximum due to non-compliance or failure to reach an agreement. How high could tariffs potentially go, and what would be the broader implications for global trade and currency valuations?

As we face these uncertainties, our initial dollar bullishness needs to be tempered with a strategic readiness for swift shifts in policy direction, which could significantly impact market dynamics and currency movements.

This will be an evolving story today.