• Tariff Shockwaves: A 104% US tariff on China rattled markets, pushing investors away from USD and into other safe havens.

• Europe Gains Ground: The euro and other European assets benefitted from USD weakness and EU’s calmer response to trade tensions.

• Risk of US Recession Grows: Inflation fears and lack of alternatives to Chinese goods make the US more vulnerable to stagflation.

• Fed Dilemma: Despite mounting recession risks, Fed officials remain cautious on cutting rates too quickly—though market odds say otherwise.

• Antipodeans Under Pressure: AUD and NZD continue to slump as China proxies, but could rebound sharply if US-China tensions cool.

USD: Sell America?

Just when the dollar seemed to be regaining some confidence, the US decision to go ahead with a tariff hike of 104% on China (alongside all other tariffs) led to a rotation away from the greenback. With risk sentiment deteriorating throughout the US session, the other safe havens CHF and JPY remain in a strong position despite another rise in global sovereign yields. Interestingly, dollar deleveraging favoured European currencies yesterday, perhaps on the view that the measured EU response to US tariffs makes a trade deal more likely.

One of the reasons why the dollar is suffering the most from additional tariffs on China is that markets feel the lack of immediate substitutes for some Chinese products means even greater inflationary/recessionary risks for the US. At the same time, there is a diminishing negative effect on Chinese exporters from additional tariffs.

While it’s true that Trump is starting to negotiate with other key partners (like Korea yesterday), the technical times for trade deals aren’t short, especially considering the large number of parts involved at the same time. We’ll watch closely whether European equities outperform US ones again today. Should that happen in unison with a further widening in the 10-year Atlantic spread (which has moved from 154 to 175bp in the past 24 hours), it would signal the additional loss of confidence in USD-denominated assets that can add pressure on the greenback as markets lose confidence in its safe haven value. We think the balance of risks is tilted to the downside today in DXY, which can break below 102.0

The data calendar is relatively light in the US today, after yesterday’s NFIB surveys pointed to softer small business sentiment and hiring plans. MBA mortgage applications will be monitored closely after having dropped for three consecutive weeks. Later today, the Fed releases its March meeting minutes. Most of the focus will likely be on the assessment of the tariff impact on inflation, although the “liberation date” delivered harsher than expected protectionism, so the March minutes are probably already outdated by now. Fedspeak is more relevant at this stage. Yesterday, Mary Daly, President of the San Francisco Federal Reserve, warned not to expect any tariff-induced rate cuts, while Chicago Fed President Austan Goolsbee suggested the Fed may need to act before the growth effect is shown on hard data. We’ll hear from Richmond Fed President Tom Barkin today.

Elsewhere, the Reserve Bank of New Zealand (RBNZ) cut rates by 25bp to 3.5% this morning, matching expectations. Guidance remained dovish, with policymakers signalling more room to cut rates as trade war effects unfold. We now think the RBNZ will take rates below 3.0%, probably to a 2.75% terminal rate, which is still above market pricing for 2.5%.

The FX implications are very much secondary compared to the direction of trade news. AUD and NZD remain key laggards in G10 due to their proxy role for China. The People’s Bank of China’s (PBoC’s) greater appetite for a lower yuan (more on the CNY section below) could take some pressure off the proxies, but it is not enough to trigger any strong rebound. AUD/USD has broken below the key 0.60 mark and NZD may follow by breaching the 0.55 support in the coming sessions. Given how far Antipodeans have fallen, they will be the biggest beneficiaries from any sign of de-escalation between China and the US.

USD: Cracks in the Greenback’s Armour

Just as the dollar was regaining ground, Washington reignited global tensions with a whopping 104% tariff hike on Chinese goods, souring market sentiment and triggering a retreat from USD. The shift saw flows into traditional safe havens like CHF and JPY, even as global bond yields climbed. Meanwhile, European currencies gained unexpectedly—likely due to the EU’s cooler-headed approach, raising hopes for a potential transatlantic deal.

What’s hurting the dollar most is its own inflation vulnerability. Tariffs are expected to strain US consumers more than Chinese exporters, with limited alternatives to Chinese goods increasing stagflation fears. While Trump has kicked off talks with partners like South Korea, trade deals take time—and markets aren’t patient.

Equity watchers will keep an eye on whether European stocks continue to outperform US ones. Combined with the widening 10-year US-EU yield spread (now up to 175bps), another strong showing from Europe could signal deeper erosion of faith in dollar-based assets. The DXY is now flirting with a critical 102.0 support level, and risks remain tilted lower.

Today’s US economic data is sparse. NFIB small business sentiment softened yesterday, while mortgage applications will be under the microscope after three weeks of declines. All eyes will turn to the Fed’s March meeting minutes later today—though recent tariff escalations may render them obsolete. More impactful will be speeches from Fed officials like Tom Barkin, especially after Mary Daly downplayed the idea of tariff-induced cuts and Austan Goolsbee hinted at preemptive action to address growth risks.

NZD & AUD: Still in the Firing Line

The RBNZ cut rates by 25bps to 3.5% as expected, with dovish signals pointing to a possible terminal rate around 2.75%—above market pricing but still accommodative. The AUD and NZD remain under pressure, acting as China proxies in the FX space. A weaker yuan, supported by the PBoC, might cushion them somewhat, but it’s not enough to drive a turnaround. With AUD/USD breaching 0.60 and NZD/USD flirting with 0.55, a US-China de-escalation would offer the most upside for these lagging currencies.

EUR: Gaining from Greenback Weakness

EUR/USD has reclaimed the 1.10 mark, mainly riding the wave of dollar weakness. The euro is benefitting from its role as the world’s second most liquid reserve currency. With markets losing faith in dollar-denominated assets, the euro is increasingly attractive—even amid soft domestic data and looming ECB cuts.

Interestingly, the prospect of ECB easing isn’t hurting the euro right now. If the narrative of “Sell America” persists into next week, the contrast between the ECB’s flexibility and the Fed’s inflation bind might even lift EUR/USD further.

GBP: Riding the Recession Risk Trade

Sterling extended its rebound, pushing towards 1.2850 as the dollar buckled. Recession fears in the US—sparked by the dramatic tariff hikes—are fuelling Fed rate cut bets and weighing heavily on the greenback. Trump’s move to slam China with higher duties, along with mutual accusations of currency manipulation, have only deepened trade war concerns.

Market odds of a Fed rate cut in May have jumped to 52.5%, from just 10.6% a week ago. With the FOMC minutes and CPI data coming up, investors will be looking for confirmation of how deeply the Fed is feeling the pinch.