Confidence crisis could extend
The US dollar index fell below 100 for the first since time 2022, dropping a whopping 3% last week – as its flipped from a safe haven to more like a risk-sensitive currency. In fact, US stocks, bonds, and the dollar have all faced simultaneous declines, amplifying fears of a mass retreat by foreign investors from US assets. Trade was fears were fanned by China’s finance ministry announcing a 125% tariff on US goods, escalating retaliatory measures. Meanwhile, the US now imposes a combined 145% tariff on Chinese imports, including a 125% duty and an additional 20% levy tied to fentanyl-related trade.
On Monday, the USD was lower, despite weekend news that the Trump administration would not include key technology imports under its tariff regime. The exemption covers mobile phones, computers and some semiconductors including Chinese imports.
Last week was a rollercoaster week for markets. Equities, slumped, pumped and slumped again on tariff-related headlines. Long-dated Treasury yields spiked, while the dollar has experienced its steepest drop against the euro and Swiss franc in a decade. Once considered the ultimate safe haven, US Treasury bonds are now under scrutiny as President Trump’s aggressive trade policies disrupt global markets. The introduction of reciprocal tariffs rapidly shifted the dollar’s status from a favoured currency to a gauge of risk aversion, reflecting growing uncertainty and diminishing confidence in US financial stability. Indeed, the inverse correlation between US yields and the dollar highlights this stark regime shift, but how long could it last?
At this point, trying to predict a bottom for the dollar is as uncertain as forecasting President Trump’s next tariff decision. The dollar, much like Treasuries, has shifted from its traditional role as a safe haven to behaving like a risk-sensitive asset. This dynamic means the USD can rally alongside struggling equities if there’s even a glimmer of positive trade news. However, it seems that only a significant rollback of protectionist policies—especially those targeting China—can truly repair the damage inflicted on the dollar over the past two weeks.
Euro has flipped from risk asset to safe haven
The euro continues to attract substantial USD outflows, allowing EUR/USD to hit a fresh three-year high above $1.14 recently. Last week we saw the pair rally over 4% in two days – its best two-day streak since 2009.
Its appeal as a liquid reserve currency, combined with market optimism that the EU will avoid escalating trade tensions with the US, has buoyed its performance alongside Europe’s current account surplus and German’s historic spending plans.
However, much of the recent surge is largely driven by weakening confidence in the dollar, with little justification from short-term rate dynamics. Notably, the EUR-USD two-year swap rate gap has widened further in favour of the dollar, suggesting a fair value closer to $1.05. That said, given the extreme volatility and unconventional trends, such calculations require caution. Markets are pricing in a 95% chance of a rate cut by the European Central Bank this week. A surprise hold could see the pair shoot above $1.15 especially amidst ongoing volatility and thin liquidity in the FX space.
Pound plagued by volatility
The British pound surged past $1.30 and peaked over $1.31 versus the US dollar last Friday, nearing a six-month high as the dollar confidence crisis gathered steam. However, with enhanced flows into the euro, GBP/EUR sunk below €1.15 for the first time since late 2023. This month alone, the pair has dropped 3.6% – on track for its largest monthly decline since 2016 and diverging (in a big way) from UK-German real rate differentials.
On the macro front, UK GDP surprised to the upside with 0.5% growth in February – five times the forecasted rate. This growth, supported by contributions from all major sectors, was bolstered by stronger factory output, likely driven by stockpiling ahead of President Trump’s new tariff measures.
The upbeat economic data slightly tempered expectations for aggressive Bank of England rate cuts, though markets still anticipate three quarter-point reductions in 2025.
This week, FX markets will be hoping for a breather after last week’s heightened volatility. Attention might divert towards macro data again, with the labour market and inflation reports from the UK top on the domestic docket.
USD opens lower despite tariff relief
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 14 – 18 April
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
