[NEW YORK] The US dollar jumped the most in three weeks after US President Donald Trump unveiled a wave of proposed tariffs, a sign investors are confident the US economy can largely withstand the impact of trade disputes.
The greenback strengthened 0.5 per cent against a basket of peers on Monday (Jul 7), picking up steam after Trump announced levies on a handful of countries. The Bloomberg Dollar Spot Index rose the most since Jun 17 and currencies across the globe slumped, with Japan’s yen, South Korea’s won and Brazil’s real among those sinking more than 1 per cent.
“The fact that some of the more problematic policies from the US administration have been dialled back – and there are deals getting done – means that the economic pain for the US won’t be as bad as originally feared,” said Skylar Montgomery Koning, a currency strategist at Barclays.
The US dollar’s decline this year – down about 9 per cent – already reflects the potential negative impact from tariffs, meaning foreign currencies are likely to decline more, she added.
Trump on Monday announced levies of between 25 per cent and 40 per cent on countries from Japan and South Korea to Laos and Myanmar, with more expected. They are set to take effect on Aug 1.
The sweeping “Liberation Day” tariffs announced in April shook investor faith in the traditional haven status of the US currency and fuelled concern that the aggressive levies would push the economy into recession.
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But investors have begun to recalibrate recently with last week’s strong US strong payrolls data adding to support for the greenback. Pricing for Federal Reserve interest-rate cuts has eased since the jobs print, with traders betting on around 51 basis points of easing by year-end on Monday, compared with 65 basis points a week ago.
Uncertainty related to US trade policies, the economic outlook and tariff-related inflation “could push back a rate cut from where we have been anticipating, September, for quite some time, until December or even into next year”, Kathy Jones, chief fixed income strategist at Charles Schwab, said on Monday. “It’s a really tough environment right now to make a policy call.”
In Japan, which faces a 25 per cent tariff, the yen fell as much as 1.2 per cent to 146.24 per US dollar, the weakest level in two weeks. In South Korea, where the levy would also be 25 per cent, the won slipped about 1.1 per cent.
Pioneer Investments Director of Fixed Income and Currency Strategy Paresh Upadhyaya said he was “not surprised” to see a broad-based sell-off in risk assets following Trump’s announcements on Monday. “If we get any negative news, which we did for South Korea and Japan, it would lead to a bout of risk aversion,” he said.
For nations elsewhere, lingering uncertainty over the final tariff rate is still hurting.
The MSCI gauge of emerging-market currencies fell 0.5 per cent, the biggest intraday drop in three months. Trump threatened an extra 10 per cent tariff on any country aligning itself with what he called “the anti-American policies” of the Brics group.
South Africa’s rand underperformed, down by about 1.5 per cent. India’s rupee, Brazil’s real and China’s offshore yuan also declined on Monday.
The term Brics originally referred to Brazil, Russia, India, China and South Africa, but has since expanded to include other developing nations.
Trump has said trading partners can expect a rate anywhere between 10 per cent and 70 per cent, implying some may have to shoulder higher tariffs than expected, though he suggested some deals are in the offing, too.
Elsewhere, speculative traders trimmed bets on the US dollar decline in the week to Jul 1, according to Commodity Futures Trading Commission data released on Monday. They now hold some US$18.3 billion worth of positions tied to a weaker US currency, down some 10 per cent from the prior week. BLOOMBERG
