Related Insights
We have recalibrated our currency forecasts. Having examined why the “Trump Put” disappointed in 1Q25, we maintain that the USD should reinstate its haven status in 2Q25. Like it or not, currency markets fluctuated from one theme to another in the past few quarters. The greenback weakened in 3Q24 into the Fed’s 50 bps cut in September, gained strength in 4Q24 on the Trump Trade, and has been removing the Trump Put this quarter.
Contrary to expectations, the USD did not appreciate as a haven on Trump’s tariffs in the first quarter. Following his inauguration as the 41st US President on January 20th, Donald Trump frustrated investors, businesses, and consumers with sudden tariff escalations and rollbacks, which heightened uncertainty, making it difficult to plan or manage risks in the medium term. For example, the Nasdaq Composite Index fell most by 9.7% YTD as of March 11th because tariffs lifted costs and led to disruptions for companies with supply chains.
Fears of a US recession eroded the American exceptionalism narrative in early March. The Atlanta Fed’s GDPNow model flagged that US GDP growth would turn negative in 1Q25, driven by a significant widening in the trade deficit. Following Trump’s victory in the November elections, US businesses accelerated imports to avoid new tariffs, which are significantly higher than those in Trump 1.0, in America’s top three import partners – Canada, Mexico, and China. Hopefully, this surge in US imports will be transitory and taper off once the tariffs are in place.
Nonetheless, a US recession would not necessarily imply a weak USD because of its significant negative effects on global growth. This was evident by the struggles of the commodity-led currencies – AUD, NZD, AND CAD – and the export-led KRW to recover this quarter despite the soft USD. Trump’s reciprocal tariffs coming on April 2nd will extend beyond Canada, Mexico, and China with a comprehensive plan to match tariffs and trade barriers with those of other countries.
Trump’s surprise initiative for peace in Ukraine through direct negotiations with Russia turned out to be a blessing in disguise for the EUR in March. The European Commission responded with a “ReArm Europe” plan that targeted up to EUR800bn to reduce dependence on external allies and enhance the EU’s defence infrastructure and capabilities against external threats. The plan also positioned the stagnant German economy for renewed growth and lifted EU bond yields against their lacklustre US counterparts.
However, Germany must approve the plan before the new Bundestag session starts on March 25th.Following the February 23rd national elections, the CDU/CSU, Social Democrats, and the (wavering) Green Party lack the super or two-thirds majority to support a constitutional amendment to relax the debt brake. The far-right Alternative for Germany (AfD) Party, which has doubled its representation in the new Bundestag, does not support the ReArm EU plan if it involves relaxing fiscal constraints or increasing the national debt. The AfD has filed a motion with the Federal Constitutional Court that the outgoing Bundestag should not make such significant fiscal decisions, which will bypass the electorate’s latest choices.
Moreover, a US-led peace plan for Ukraine and Russia in the context of ReArm EU remains challenging, i.e., how to negotiate a settlement that satisfies the security concerns of Ukraine and Russia – all without escalating into a broader NATO-Russia confrontation.
Meanwhile, Ukraine has supported a US proposal for a 30-day ceasefire with Russia at the meeting between their officials in Saudi Arabia. The US would immediately lift the pause on intelligence sharing and resume security assistance to Ukraine, which is amenable to concluding a rare minerals deal as soon as possible. Washington will now direct diplomatic efforts to secure Moscow’s agreement to the truce and facilitate subsequent peace negotiations. The US will likely need to engage their European and NATO allies to discuss their defence and peacekeeping initiatives. Achieving peace between Ukraine and Russia remains extremely complicated because of deep-rooted geopolitical, historical, and security issues. The ceasefire is only a first step. Realising lasting peace will require painful compromises, strong diplomatic efforts, and long-term binding security agreements that both sides and their backers can accept.
Concluding remarks
While the USD did not initially strengthen in response to Trump’s tariffs this quarter, the volatility has reinforced the complex interplay between US trade and geopolitical policies, European politics, and global growth dynamics. Despite the risk of a US recession, we cannot rule out global risk aversion underpinning the USD. The sustainability of the EUR’s support from Trump’s peace initiative in Ukraine depends on Germany overcoming the constitutional hurdles to onboard the ReArm Europe plan. Looking ahead, the FX landscape should continue to hinge on the implementation of Trump’s reciprocal tariffs, Germany’s fiscal path, and the still uncertain path toward peace in Ukraine.
Quote of the Day
“The weak can never forgive. Forgiveness is the attribute of the strong.”
Mahatma Gandhi
March 12 in history
In 1930, Mahatma Gandhi started his famous 200 mile protest march against the widely hated British salt tax.
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