USD: Trade wars can be messy – ING

FX markets should focus on two themes today: the US Court of International Trade ruling that the majority of President Trump's tariffs are illegal, and insights from the minutes of the 7 May FOMC meeting, which suggest that dollar selling in April was driven by hedging rather than outright sales of US assets. The dollar has rallied around 0.5/0.7% in Asia on the view that Trump may be more constrained in his trade war. This follows a court ruling that found he had exceeded his authority by invoking emergency powers to impose reciprocal tariffs in April, as well as earlier fentanyl-related tariffs on Canada, Mexico, and China. The White House is, as expected, appealing the decision, ING's FX analyst Chris Turner notes.

USD may stay bid in the near term

"The news that the legal system is constraining the use of tariffs has been welcomed by US equity markets, where S&P futures are up around 1.2% in Asia. Nvidia's first-quarter earnings report is also helping here. This is slightly bearish news for US Treasuries in that better US growth prospects further reduce the chance of an earlier Fed cut, but also that the assumed tariff revenue may not materialise to offset the fiscally expansionary Big, Beautiful Bill currently passing through Congress. Notably, the US 10-year US swap spread remains wide at 55bp and the risk premium in US Treasuries may be one of the factors preventing a more whole-hearted rally in the dollar."

"The FOMC minutes are worth a read as they provide the Fed's take on market developments in April. They attribute the Treasury sell-off more to the swap spread (US 10-year Treasuries versus swaps) than to the basis trade (cash versus futures). The Fed also noted, based on feedback from its market contacts, that the sharp decline in the dollar was primarily driven by increased FX hedge ratios, rather than significant foreign selling of US assets. While acknowledging that global investors only change strategies slowly and not ruling out future changes, the suggestion that the dollar selling was mainly driven by hedging is slightly less serious for the dollar."

"For today, the focus will be on revisions to the first-quarter GDP data and initial claims. Presumably, we will all be watching President Trump's social media feed too to see what he makes of last night's court ruling on tariffs. We think the combination of this tariff news and a slightly hawkish FOMC minutes (almost all participants commented on the risk that inflation could prove to be more persistent than expected), can help the dollar stay bid in the near term. The best case for DXY is probably a 1.6% rally to 102.00 – but this won't be in a straight line and conditions will remain choppy."