(Kitco News) – Trump’s inauguration speech didn’t provoke any near-term trade actions or economic emergencies, so the pullback in the U.S. dollar can probably run a little further, but the move is likely temporary, according to Chris Turner, global head of markets and regional head of research for UK & CEE at ING.
“The fact that trade policy did not feature prominently in President Donald Trump’s inauguration speech has triggered a decent correction lower in the dollar,” Turner wrote on Monday evening. “We cannot rule out a near-term extension when US financial markets fully reopen on Tuesday, but this looks more like a temporary setback for dollar bulls.”
This didn’t mean that no emergencies were triggered during the inauguration, however. “President Trump declared two emergencies today: one on the southern border to address his immigration agenda and one for national energy, which will allow more US drilling of oil and gas,” Turner noted. “The latter is marketed as a means of lowering US inflation. There was no national emergency today in the economy – a declaration that some had seen would go hand-in-hand with Day One trade tariffs. And consistent with a Wall Street Journal article which had hit the dollar earlier in the day, there were no Day One tariffs.”
The updates that markets did receive on tariffs were “Trump’s inauguration speech, highlighting that an External Revenue Service (ERS) would be established to collect ‘massive’ tariffs from trading partners,” followed by “a Bloomberg article suggesting there is a factsheet circulating in government circles on trade” which is rumored to indicate a more measured approach, though this has yet to be confirmed.
“Instead of new tariffs on China, and consistent with Trump’s call with President Xi last Friday, the report suggested that the new administration would investigate unfair trade practices globally and determine to what degree China had delivered on its commitments to the Phase One bilateral trade deal agreed in 2020,” he noted. “Clearly, the above is far less severe than the prospect of a 10-20% universal tariff, a 25% tariff on Mexico and Canada, and a 60% tariff on China - threats that appeared on the campaign trail. It is far too soon to declare that the worst of the tariff threat has passed. But certainly, Day One has gone much better for international trade than most had feared.”
The Bloomberg report also indicated that federal agencies would monitor whether trading partners were manipulating currencies to their own trade advantage. “That monitoring is already undertaken on a semi-annual basis by the US Treasury,” Turner noted. “And countries on that Monitoring List now are China, Korea, Singapore, Taiwan, Japan, Vietnam and Germany. At the heart of the designation of a currency manipulator is whether a country is buying FX to stop its currency from appreciating. The thing is that many of the countries (especially in Asia) are using direct and indirect methods to sell FX and stop their currencies from depreciating.”
“We would not rule out some, let’s say, ‘arbitrary’ use of the currency manipulator tag during this new administration,” he added. “But suffice it to say the key criteria are not being hit now.”
What all this adds up to is a near-term weakening of the USD against other G10 currencies. “So far, the out-performer has been the New Zealand dollar, the biggest loser over the last three months on the country's big twin deficits,” Turner wrote. “We’re a little surprised that EUR/USD has done so well late Monday (+ 1.5%), but that probably reflects positioning too; short EUR/USD has been a conviction call for many in the G10 space.”
ING is also seeing decent recoveries from emerging market currencies, and from the Chinese renminbi in particular. “Here, USD/CNH is off 0.75% and could correct further in Asia as the US bond market reopens and China trade risk is temporarily re-appraised,” Turner said. “You have to ask whether we could see US yields on less aggressive-than-expected tariffs.”
He added that the EUR/USD bounce has stalled at the 1.0435 high from early January. “We cannot rule out a brief spike to the 1.05/1.06 area if the newsflow over the next 24/48 hours confirms this more measured approach to trade,” Turner said. “Yet we see no reason to change our quarterly forecast for EUR/USD, which foresees losses through the year to 1.01.”
The degree of volatility that was predicted for the transition to the second Trump term has also unfolded. “One-week EUR/USD traded volatility has been priced up to 10% around inauguration day,” he said. “And one-week realised volatility is delivering at 10% as well. More social media-driven, headline-grabbing policymaking is likely to keep FX volatility elevated, at least in the early days.”
The near-term weakness in the dollar has been a boon for gold prices on Tuesday, with spot gold last trading at $2,735.68 per ounce for a gain of 1.03% on the session.
