The USD is the best performing G10 currency this month, as investor concerns over Trump tariff policies are easing following trade deals with Japan and the EU. Likewise, the USD has strengthened against almost all Asian currencies this month, except THB. The trade deals gave finality over tariff rates for major economies and imply an end to persistent uncertainty over trade. This provides relief to USD asset holders even as details of the deals are yet to be fully ironed out, and with questions over the financing mechanism of promised large-scale investment into the US also unanswered.
USD gains may however be dampened if the FOMC signals a more dovish policy tone tonight, with Governor Waller being a notable proponent of looking through tariffs as one-time price increases and supporting rate cuts. Also, several US mega-cap tech firms will be reporting earnings, which could potentially influence market risk sentiment.
EUR/USD has seen the sharpest fall in the last two weeks towards 1.15, with the decline of the EUR notably outpacing that of the JPY despite both EU and Japan facing the same headline tariff rate of 15%. One reason is that EUR has been the bigger beneficiary of diversification flows from the USD since Liberation Day, and its give-back is naturally larger when US trade risks dissipate, and confidence returns. Another reason relates to changes in direct investment flows over the medium term. A 15% tariff differential means that investment in Europe will become less competitive compared to investment in the US, potentially leading to changes in firms’ capital investment going forward. It is likely that the investment amount swayed by tariffs will be far larger for the EU than for Japan, with the EU having USD19trn economy compared to Japan’s USD4trn.
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