In the first quarter of this year, the financial markets will try to find stability, while the administration of the new US President Donald Trump, on the contrary, will try to make a maximum impression from the beginning. One of the easiest measures he can quickly implement is tariffs on imports from abroad. The more extensive the tariff program will be compared to expectations, the greater the risk of further strengthening of the US dollar, pointed out in the current analysis the chief macroeconomic strategist of Saxo Bank John Hardy.
According to him, one of the key currency pairs that the markets will focus on will be the US dollar and the Chinese yuan. “For the euro-dollar exchange rate, if the US adopts significant tariffs aimed at Europe, a focus on parity is expected,” Hardy predicts. In the case of the dollar and the Japanese yen, the exchange rate would probably test cyclical highs above the level of 160 JPY/USD, unless the Bank of Japan dramatically accelerates the tightening of monetary policy or deploys massive interventions in the currency market.
Currency devaluation risk
According to Hardy, some experts say overly broad tariffs are a bad idea because they will only devalue the currency of the country they are imposed on without the desired shift of production back to the US. Instead, well-targeted tariffs at significantly higher percentages could prevent a broader currency effect and encourage the restructuring of key supply chains. However, the risk lies in the fact that the countries on which tariffs are imposed will come up with countermeasures, the analyst pointed out.
For example, China has already imposed embargo-like controls on exports of rare earths, which are key to semiconductor production, in response to tariffs from the previous US administration of Joe Biden. “China has significant leverage in many critical US supply chains. It manufactures a range of components important to the US defense industry, the pharmaceutical industry and has the largest capacity for the production of batteries for electric cars in the world. So the tariffs are not as simple as Trump makes them out to be,” Hardy explained.
The second possibility of weakening the US dollar lies in a coordinated grand deal with China, Europe and Japan. However, in an increasingly divided world, such a scenario seems unlikely, the analyst added.
