6 Month Highs on USD Overnight.

USD: Tariffs Shake Confidence, Dollar Slumps

The US dollar is under intense pressure as trade fears escalate. The trade-weighted DXY index has hit a new low for the year, driven by concerns over the economic fallout of reciprocal tariffs. These fears have rattled US equities, pushing them lower and forcing a more dovish reassessment of Federal Reserve policy. As of now, S&P 500 June futures point to a 3% decline, following a similar drop in Asian equity markets.

Analysts have begun dissecting the impact of Trump’s sweeping tariff measures, which include 60% levies on Chinese goods, 20% on EU imports, and a universal 10% baseline duty. While these tariffs are being framed as “discounted,” there’s potential for further escalation if trading partners retaliate. The specter of a global trade war looms large, stifling any potential rebound in risk assets.

In currency markets, the clearest expression of this turmoil is seen in CNH/JPY. Asian economies—responsible for 60% of the US goods deficit—are feeling the brunt of the tariffs. The offshore USD/CNH pair has surged, though Chinese authorities are expected to maintain control over the onshore USD/CNY rate. A PBoC fixing above 7.20 could trigger another wave of Asian FX weakness.

Elsewhere, investors are seeking refuge in traditional safe-haven currencies. The Japanese yen and Swiss franc are benefiting the most, with some support also seen for the euro. The tariffs’ economic blowback on the US is leaving the dollar vulnerable, and only a major surprise—such as unexpected tax cuts—could provide a floor for the greenback. Ironically, Washington had hoped tariffs would strengthen the dollar to shield consumers from rising import costs. Unlike in 2017/18, when tax cuts preceded trade restrictions, the current backdrop lacks supportive fiscal measures.

Short positions on USD/JPY remain a popular trade to reflect growing pessimism about US demand. Key support at 147.00 is holding for now, but deeper US equity losses could push it toward the 145.00 mark.

For today’s session, traders will focus on US initial jobless claims and ISM Services data. Additionally, the risk of European retaliation—especially in the services sector—remains a key factor to watch.

With risk assets struggling, DXY has now erased nearly 75% of its gains since October’s Trump-driven rally. A further dip toward 102.00 seems likely.

EUR: Rising, But on Unstable Ground

The euro has climbed nearly 0.9% against the dollar following the tariff announcement. However, the idea that Europe is now in the clear seems premature. The euro’s rally is largely due to its status as a liquid alternative to the struggling dollar, rather than confidence in the European economy.

Washington appears to be favoring a weaker dollar, and major institutional investors—such as FX reserve managers—may seek to reduce dollar holdings over time. Trump’s Executive Order echoes sentiments from economist Stephen Miran’s Mar-a-Lago accord paper, which advocates for a long-term depreciation of the US dollar.

Although trade wars typically pose a downside risk to the euro, the US economic slowdown is the more dominant driver for EUR/USD at the moment. A sharp sell-off in US equities, combined with falling bond yields, could push EUR/USD above 1.10. Stronger resistance lies in the 1.11/1.12 region, and a break beyond that would require a severe deterioration in US economic conditions.

For now, EUR/USD will likely track US equity movements, as investors recall past episodes where protectionist policies triggered major stock market declines.

GBP: Sterling Surges as Dollar Plummets

The British pound has soared past 1.3100 against the US dollar, reaching its highest level in nearly six months. The move comes as Trump’s tariffs hit market sentiment hard, dragging down the greenback.

The DXY index has plunged to around 102.70 following Trump’s announcement of a 10% baseline duty on all imports, alongside steeper tariffs on key trading partners. Global markets anticipate that these measures could push the US economy into recession, fueling expectations of further Federal Reserve rate cuts. However, the inflationary impact of higher import costs complicates the Fed’s policy outlook.

Stephen Miran, Chair of the US Council of Economic Advisers, acknowledged in a Fox Business interview that these protectionist policies could create “short-term bumps” in the economy. Still, he emphasized Trump’s broader strategy of restructuring trade to enhance long-term economic sustainability and fairness.

Looking ahead, investors will monitor US S&P Global and ISM Services PMI data, which will be released during North American trading hours. The S&P Global Services PMI is expected to align with previous estimates of 54.3, while the ISM Services PMI is projected to dip slightly to 53.0 from 53.5 in February, indicating a slowdown in service sector growth.