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Our belief in US President Donald Trump’s tariffs driving the USD’s haven appeal paid off. US President Donald Trump announced 25% tariffs on imports from Canada and Mexico and an additional 10% tariff on Chinese imports taking effect from February 4. During Trump 1.0, the US-China tit-for-tat tariff war that started in 2018 maintained the USD’s haven status until it became clear that the Phase One Trade deal was coming in January 2020. Due to the retaliatory nature of the trade war, the USD’s uptrend also ended up choppy after its initial surge in 2Q18.
US-led trade tensions today will likely be worse than Trump 1.0. Trump is imposing tariffs faster, at higher rates, and with a broader scope, targeting most goods from both rivals and allies alike. The universal tariff policy under Trump 2.0 extends beyond its previous role as a leverage tool for negotiation in Trump 1.0. First, Trump has adopted a more protectionist stance that aims to boost domestic production apart from reducing the trade deficit. Second, the tariffs are positioned as a revenue source to offset the extension of tax cuts set to expire at the end of 2025. Third, Trump’s tariff threat against the Eurozone aligns with his objective of boosting US oil and gas exports.
Speculators held on to their net short currency positions, underscoring the USD’s fall in January as a correction in the uptrend established during the Trump Trades in 4Q24. Last week’s FOMC decision to keep rates unchanged affirmed the Fed’s concerns over inflation’s slow progress towards the 2% target due to Trump’s policy mix of tariffs, tax cuts, and mass deportation of illegal migrants. Hence, the Fed’s congressional semi-annual testimonies on monetary policy on February 12 could be a significant event rolling back Fed cut expectations. Conversely, many central banks continued to ease monetary policy to support their less resilient economies in anticipation of heightening global trade tensions. Markets have also increased their bets for 25 bps cuts in the UK on February 6, Australia on February 18, and a 50 bps cut in New Zealand on February 19.
Quote of the Day
“Nobody ever lost a dollar by underestimating the taste of the American public.”
P,T. Barnum
February 3 in history
P.T. Barnum purchased the world-famous circus elephant Jumbo in 1882.
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