Tariff Turbulence and Hedge Headwinds: Dollar Digs In.
US court ruling limits Trump’s ability to use tariffs, prompting a dollar rally and boosting equities.
FOMC minutes suggest April’s dollar decline was driven by FX hedging, not asset dumping.
US Treasuries pressured as fading tariff revenue reduces offsets for Congressional spending, keeping yields firm.
EUR/USD drifts lower as rate differentials widen and the dollar regains support.
GBP stays strong thanks to higher rates and better trade positioning relative to the euro.
USD: Courts Clip Trump’s Tariff Wings
FX markets are dialed in on two stories: the US Court of International Trade’s ruling against Trump-era tariffs and the Fed’s latest FOMC minutes. The court found that most of Trump’s tariffs exceeded his legal authority, particularly those levied under emergency powers. As expected, the White House is appealing, but the legal setback is seen as a check on aggressive trade policy.
Markets reacted quickly: the dollar jumped 0.5–0.7% in Asia, and equity futures climbed with the S&P up 1.2%, helped by Nvidia’s strong Q1 earnings. However, US Treasuries remain under mild pressure. Fewer tariffs could mean less offsetting revenue for Congress’s latest big spending plans, which may push Treasury yields higher. With 10-year US swap spreads still wide at 55bp, risk premium concerns continue to cap more aggressive dollar strength.
The FOMC minutes added texture, showing that April’s dollar weakness was more about increased FX hedge ratios than a mass foreign exit from US assets. Hedging remains expensive—three-month forwards cost European investors 2.4% per annum—which means the dollar needs ongoing negative news to stay under pressure. With this latest court decision easing some of that pressure, the dollar is finding its footing again. A DXY rally to 102.00 isn’t off the table, though don’t expect a smooth ride.
EUR: Mild Retreat on Dollar Resilience
EUR/USD is sliding as US growth prospects modestly improve post-court ruling. The case for a stronger dollar now looks incrementally better, especially as markets start to refocus on rate differentials. The two-year swap spread between the euro and dollar sits at 180bp—levels that historically pushed EUR/USD down to the 1.06 zone.
While April’s dollar selloff had global investors reconsidering their hedge exposure, the euro is currently struggling for upside without new eurozone catalysts. That could change on 25 June when Germany may announce a new fiscal stimulus package. Until then, EUR/USD might drift toward 1.1050, in line with year-long expectations of a 1.10–1.15 range.
GBP: Sterling Holds Steady
Despite better global trade news, EUR/GBP remains under pressure. The UK’s favorable trade alignment with the US and relatively high interest rates (4.30% vs. the euro’s 2.2%) are helping support sterling. Markets also appear less concerned about the upcoming 11 June UK spending review. Sterling’s resilience may persist as long as rate and trade differentials remain supportive.