US Dollar Drops as Investors Fear Economic Impact of US Tariffs
Market Reaction
The US dollar dropped versus safe-haven currencies and the euro on Wednesday as investors worried about the economic impact of US tariffs, which spooked the world’s equity markets. Major stock indexes sank, while a sell-off in US Treasuries sparked fears foreign funds were fleeing US assets.
US Tariffs Take Effect
US President Donald Trump’s "reciprocal" tariffs on dozens of countries took effect on Wednesday, including massive 104 per cent duties on Chinese goods. Beijing retaliated with an 84 per cent tariff on US goods from Thursday, deepening a global trade war.
Analysts Warn of US Recession Risk
Analysts said recent developments significantly increase the risk of a US recession.
Currency Market Reaction
The greenback dropped 1.05 per cent against the safe-haven yen to 144.70 and 0.90 per cent versus the Swiss franc after hitting a fresh six-month low at 0.8379.
Expert Insights
"We are witnessing a simultaneous collapse in the price of all US assets including equities, the (US) dollar versus alternative reserve FX and the bond market," said George Saravelos, global head of forex research at Deutsche Bank. "We are entering uncharted territory," he added, arguing that "the US administration policy is encouraging a trend towards de-dollarisation."
Market Volatility
Some market participants believe that investors including hedge funds have been selling liquid assets such as US government bonds to meet margin calls due to portfolio losses across asset classes. Some hedge funds have offloaded stocks as the market plunge forces them to curtail trading using borrowed cash.
Euro Rallies
The euro also jumped, helped by reports Germany’s conservatives had reached a deal with the centre-left Social Democrats to form a government, easing political concerns in the European Union’s (EU) largest economy. The single currency firmed 0.7 per cent to US$1.1033, creeping back towards last week’s peak at US$1.1147.
Citi Analysts Cut Forecasts
Citi analysts cut their 2025 eurozone growth forecast from 1 per cent to 0.8 per cent and their 2026 forecast from 1.3 per cent to 0.6 per cent. They also lowered their inflation expectations for the next three years, with the 2026 harmonised consumer price index now projected to average 1.6 per cent.
EU Countries to Approve Countermeasures
EU countries are expected to approve on Wednesday the bloc’s first countermeasures against US tariffs.
Rate Cut Expectations
Markets are pricing in 105 basis points (bps) of rate cuts from the Federal Reserve this year, from around 100 bps the day before. They now forecast 85 bps of European Central Bank monetary easing, up from around 70 bps on Tuesday, while fully pricing in a 25-bp cut next week compared with a 90 per cent chance previously.
Renminbi Weakness Continues
The greenback was down 0.5 per cent versus the yuan offshore at 7.387, after reaching an all-time high at 7.4288. "Weakness in the renminbi (yuan) continues to reflect building speculation over the potential for bigger devaluation in response to the intensifying trade war between the US and China," said Lee Hardman, senior currency analyst at MUFG.
Conclusion
The US dollar dropped sharply against safe-haven currencies and the euro as investors fear the economic impact of US tariffs. The trade war between the US and China is intensifying, and analysts warn of a significant increase in the risk of a US recession.
Frequently Asked Questions
Q: What is the current state of the US dollar?
A: The US dollar dropped 1.05 per cent against the safe-haven yen to 144.70 and 0.90 per cent versus the Swiss franc.
Q: What is the impact of US tariffs on the global economy?
A: The trade war between the US and China is intensifying, and analysts warn of a significant increase in the risk of a US recession.
Q: What is the current state of the euro?
A: The euro firmed 0.7 per cent to US$1.1033, creeping back towards last week’s peak at US$1.1147.
Q: What are the implications of the trade war on the renminbi (yuan)?
A: The weakness in the renminbi (yuan) continues to reflect building speculation over the potential for bigger devaluation in response to the intensifying trade war between the US and China.
