Above: File image of Donald Trump. Image: Official White House distribution.
The Dollar's fall following Tuesday's tariff announcement has caught market participants and analysts off guard.
"This reaction in USDCAD is one of the most mind-blowing things I have ever seen in thirty years of FX trading," says Brent Donnelly, analyst at founder of Spectra Markets.
A number of people who were expecting their dollars to strengthen on the tariff announcement have expressed their dismay to the team at Pound Sterling Live as they now find their transfer budgets a little lighter than they were expecting.
Our Week Ahead Forecast models also saw USD strength against EUR, CAD, GBP and everything else on the confirmation of tariffs.
The calls were based on the assumption that the FX market still viewed tariffs as supportive of U.S. inflation, interest rates and the Dollar and was something a clear majority of professional analysts and strategists would have anticipated.
But, in the event, the Dollar index has fallen by one per cent for two days in succession and looks set to record a notable third daily decline according to early midweek action.
Tariffs are backfiring on the dollar 'bulls.'
George Saravelos, lead FX strategist at Deutsche Bank, says the Dollar's slump following Tuesday's tariff announcement by Donald Trump was not something he would have expected at the start of the year. He explains that two mutually reinforcing themes have been building in recent weeks to prompt him to becoming "more open-minded to the prospects of a broader weaker trend unfolding." You can read about this here.
The Euro-Dollar exchange rate has powered through a key resistance at 1.0530, which is acting as a glass ceiling that is preventing further USD weakness elsewhere.
Now that Euro-Dollar has broken resistance, the floodgates have been opened for other Dollar pairs.
"I suppose you can argue the dollar is so overvalued that even 25% tariffs on Canada cannot push USDCAD higher. If USDCAD doesn’t go up on this, there is no reason to think EURUSD will go down on tariffs, either. Or AUDUSD. I am going long AUDUSD with a stop at 0.6054. And long EURUSD," says Donnelly.
Strategists at Morgan Stanley say fundamentals increasingly point to a lower Dollar as the 'U.S. exceptionalism' narrative evolves toward 'global convergence'.
"We remain bearish on the DXY and continue to recommend long EUR, GBP, and JPY positions versus the USD," says strategist David S. Adams.
Morgan Stanley strategy maintains a long EUR/USD position, targeting 1.08, and raises its GBP/USD target from 1.27 to 1.30.
Above: Like a dam bursting, EURUSD's ascent through the resistance ceiling at 1.0530 opens the door to widespread USD weakness.
Investment banks are also in the process of revising forecasts for the Dollar based on the recent price action, no longer seeing it falling to parity against the Euro in 2025.
Prominent names include Goldman Sachs, MUFG Bank and TD Securities.
Goldman Sachs forecasts Euro-Dollar at $1.01 in six months, weaker than current levels, but stronger than its previous call for $0.97.
"This changing reaction of the dollar comes amid an apparent broader shift in market perspectives on tariffs over the past few weeks, with the focus moving from the potential boost to inflation to the negative implications for growth," says Jim Reid, Strategist at Deutsche Bank.
"A shake-up the new government wanted is underway, and there is early evidence emerging that confidence is wobbling, from tariff uncertainty in particular," he adds.
A slowdown in U.S. economic data is becoming clear, which is leading financial markets to bet on further interest rate cuts at the Federal Reserve. Money markets show investors are pricing in 75 basis points of cuts by the December meeting.
This implies three 25bp cuts, which is up from the solitary cut expected at the start of February. This is weighing on U.S. bond yields, which in turn mechanically weighs on the Dollar.
"The latest U.S. economic data continues to suggest that Trump policies are making a notable impact on activity," says Sam Hill, Head of Market Insights at Lloyds Bank.
Looking ahead, if the tariffs = weaker USD relationship persists, it would stand that the currency can recover on any walk-back on tariffs by Trump.
Already, we hear this might be the case, with Commerce Secretary Howard Lutnick telling Fox News on Tuesday that the President was looking to "work something out" with Canada and Mexico.
A falling dollar won't bother Trump, but falling stock markets will. That U.S. stocks tanked on the commencement of tariffs shows a clear concern that the economy could be in trouble.
A rowback and USD relief could, therefore, be on the cards.