Key takeaways

• Tariff headlines appear to be less provocative for FX markets.
• Perhaps, markets assume that some deals could be struck...
• …which creates an upside risk for the USD.

The law of diminishing returns seems to be in play, as tariff-related headlines seem less provocative for FX markets (see the chart below).

Source: Bloomberg, HSBC

On 1 February, US President Donald Trump announced a 25% tariff on imports from Canada and Mexico (a 10% tariff on Canadian energy) and a 10% additional duty on Chinese products. The US Dollar Index (DXY) jumped briefly following the weekend’s tariff headlines. There is still a great deal of uncertainty about how the situation will unfold, with moves on Mexico and Canada delayed to 4 March (Bloomberg, 4 February 2025). The DXY erased its earlier gain. That being said, the new 10% tariff on all Chinese imports to the US came into effect on 4 February and China’s tit-for-tat import taxes on some US goods came into effect on 10 February. The DXY hovered around the 108 level (Bloomberg, 10 February 2025).

The USD was basically unchanged on the day against most other G10 currencies, despite US President Donald Trump’s confirmation on 11 February that the 25% tariffs will be imposed on US steel and aluminium imports without exceptions, and with an indication from Trump that they may go higher (Bloomberg, 11 February). Markets also shrugged off various promises of retaliation, including from politicians in Canada and the EU. Perhaps, FX markets are once again assuming a deal will be struck with key trading partners before they actually go into effect on 4 March. Whether one views the lack of market action as complacency or pragmatism, it creates an upside risk for the USD, should these latest tariffs end up being implemented. It also shows that the risk of a tit-for-tat escalation is prominent, heightening the stagflationary threat for the global economy.

It is also worth noting that the prior premium in the USD relative to its rate differential, potentially reflective of a Trump policy uncertainty premium, has been mostly erased. Whether the premium re-emerges may hinge on whether tariff threats transform into tariff reality. FX markets will probably remain tied to headlines about US policies, like reciprocal tariffs. We still believe the USD is likely to strengthen further, amid the divergence in both growth and monetary policy between the US and other economies, among other factors.

https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-and-tariff-headlines/