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The USD’s weak momentum carries potential risks too.
Following last week’s aggressive sell-off, we are staying vigilant regarding factors that can hurt or reverse its downward momentum. Last week, the DXY and the S&P 500 indices returned to levels observed around the November 2024 US elections. Investors perceived Trump’s trade and geopolitical actions as undermining the narrative of US exceptionalism. However, after the greenback’s aggressive sell-off last week, the 14-day RSI indicated that the DXY has entered oversold territory, while the EUR and GBP have reached overbought levels.
The DXY’s recoupling with the US 10Y bond yield may move it away from Trump’s erratic announcements towards a more fundamentally driven market.
Before this week’s Fed blackout period, Fed Chair Jerome Powell played down growth worries after last Friday’s lower-than-expected nonfarm payrolls, adding that the Fed was separating the signal from the noise. Powell emphasized the Fed was well-positioned to wait for greater clarity on the net effects of the White House’s four main policy thrusts – trade, immigration, fiscal policy, and regulation – before making any adjustments to interest rates. Here, markets will seek guidance in the Fed’s Summary of Economic Projections, given the forgone conclusion that the Fed Funds Rate will stay unchanged at 4.25-4.50%.
On tariffs, the Fed will pay attention to longer-term inflation expectations. Today, the New York Fed inflation expectations at the 1Y, 3Y, and 5Y horizons may extend their rises above 3% in February. This coupled with upside surprises in CPI inflation (out on March 12th), could lift the US Treasury 10Y yield and the DXY. If so, this could undermine the JPY and the CHF as alternative havens to the USD.
Despite Trump’s inconsistent approach to tariffs on US imports from Canada and Mexico, characterized by temporary delays and partial exemptions, he warned of possible reciprocal tariffs on Canadian lumber and dairy products this Friday. Neither Canada nor Mexico will be spared from the 25% tariff on steel and aluminium taking effect on March 12th. Trump promised a wave of reciprocal tariffs on April 2nd which will target EU goods with a 25% tariff.
Trump was unwavering in incrementally escalating tariffs on Chinese goods from 10% on February 4th to 20% on March 4th. Canada and China have retaliated with tariffs on US goods, with Mexico and the EU promising to do the same. Most countries, including the US, believe tit-for-tat tariffs would hurt the global economy, a factor that could reinstate the USD’s haven status.
Besides his trade policy escalating global trade tensions, Trump’s foreign policy affects international relationships.
The DXY’s decline last week was driven by the whopping 4.4% surge in the EUR, its largest component. Following the Trump-Zelensky clash in the Oval Office on February 28th, EU nations collectively reinforced their commitment to uphold security and sovereignty in Ukraine and Europe in response to greater external threats from America’s withdrawal of support. The EU 10Y bond yield surged 43 bps to 2.84% on the “ReArm Europe” plan to mobilize up to EUR800bn to enhance the EU’s defence infrastructure by relaxing the EU budgetary constraints. However, the EU’s consensus-based decision-making process can delay the implementation of the ambitious defence initiatives.
Moreover, the EU’s goal to deter future Russian aggression could be perceived by the Kremlin as provocations, resulting in a hardening stance that makes it challenging to achieve sustainable peace in Ukraine. Washington’s withdrawal of military aid and intelligence has emboldened Russia to intensify military operations against Ukraine to weaken Kyiv’s political will.
US and Ukrainian officials will meet in Saudi Arabia to resume dialogue on the Washington-led peace initiative with Russia. Ukrainian President Volodymyr Zelensky will meet Saudi Arabia’s Crown Price but not attend the talks led by US Secretary of State Marco Rubio. The Ukrainians will want to establish whether Washington will resume military support for Ukraine upon signing the minerals deal and whether the US is pushing for elections in Ukraine.
Overall, it is still premature to expect significant progress towards peace or a ceasefire between Ukraine and Russia. Finding a middle ground remains challenging, given Ukraine’s determination to defend its sovereignty and territorial integrity against Russia’s insecurity regarding Western encroachment.
Hence, the EUR’s upward momentum may wane or even correct if worries return over Ukraine’s precarious situation and potential US tariffs on EU goods or if US inflation and inflation expectations start surprising.
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March 10 in history
The Dot.com bubble peaked in 2000, with the Nasdaq Composite hitting 5048.62.
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