US Dollar Strengthens After Trump Speeds up Tariff Demands
- Feb 3
- 3 min read
Updated: Feb 10
GBP : UK to avoid Trump Tariffs?
As investors grow more optimistic that the United Kingdom (UK) won't be subject to high tariffs from the United States (US), the pound sterling (GBP) outperformed its major peers on Monday, with the exception of safe-haven assets like the USD and the JPY. President Donald Trump of the United States imposed 10% tariffs on China and 25% tariffs on Canada and Mexico over the weekend.
Trump had previously threatened to impose higher tariffs on his allies in North America for permitting the entry of harmful opioids like fentanyl and illegal immigrants. Trump, like his counterparts in North America and China, threatened to slap tariffs on Europe. However, he adopted a more lenient stance toward the UK, stating that while tariffs might be implemented, a deal could be reached since Prime Minister Keir Starmer has been "very nice." As a result, the Pound Sterling is now more appealing to risk-averse investors.
EUR : Investors tempted to sell
Two obvious drawbacks for the Euro are the growing possibility of a global trade war and the possibility of tariffs directed against the EU. Expectations of more easing from the European Central Bank and less easing from the Fed have caused the main two-year EUR/USD rate differentials to widen by about 20 basis points over the last two days. Early Asian trading saw EUR/USD drop to a new cycle low of $1.0210 due to the increased risk premium brought on by global trade concerns. There is currently a gap to the upside of $1.0350. To close it, though, it would probably take either an indication that the trade talks in North America are moving forward or a significant sell-off in stocks that causes widespread deleveraging in a market that is substantially long the dollar.
The Euro is also likely to suffer from Europe's tough rhetoric, which indicates that it won't be readily influenced. Furthermore, investors will probably continue to be tempted to sell into EUR/USD rallies due to the impending prospect of a significant report in April that might support US-wide tariffs.
USD : Dollar Strengthens After Trump Speeds up Tariff Demands
FX markets were taken by surprise when the U.S. announced on Saturday that it would begin imposing full tariffs on Canada and Mexico tomorrow. A start date of March 1 was proposed just a day early, allowing for talks. The Trump administration's "maximum pressure" strategy instead seeks to negotiate speedy agreements, though it's unclear how these tariffs will be reversed. President Trump's remarks imply limited room for flexibility and allude to a move toward a low-tax, high-tariff American economy. Universal tariffs may be made possible by a significant Commerce Department study that is due in April.
The DXY index jumped 1% as a result of the dollar's robust reaction. The Canadian dollar fared marginally better, while commodity currencies like the Australian and New Zealand dollars were severely hurt. A 2% decline in S&P futures due to concerns about supply chain disruptions and declining corporate profits helped defensive investments like the Swiss franc and Japanese yen perform better. The yield curve in the United States flattened, with 10-year yields declining as recession concerns increased and Fed rate-cut expectations somewhat waning—both of which were factors that were favorable to the dollar.
Although expectations are modest, investors will keep an eye out for any last-minute discussions between President Trump and the leaders of Canada or Mexico. Reactions from the equity market will be crucial; a steep sell-off would rekindle expectations of more dovish Fed policy, which would help the Yen even when compared to the dollar. Growth-sensitive and commodity-linked currencies remain vulnerable.
This week, macro data is less important, but the ISM manufacturing data today and the jobs report on Friday—which may be affected by benchmark revisions—could have an impact on the dollar. The DXY is predicted to remain stable near its annual highs unless Trump abruptly de-escalates tariffs; Friday's data presents the best opportunity to bridge the overnight gap toward 108.56.
