Trump gets his way on the currency market

The stock market falls are a lot more severe than US President Donald Trump expected when he announced his new tariffs. He will undoubtedly be pleased that the dollar is also under pressure.

The new trade tariffs that Trump introduced on 'Liberation Day' are causing great unrest on the financial markets. This is not surprising when you look at what exactly is happening. As of tomorrow, the average duty that importers in the United States have to pay will increase from 4,8% to 20%. The import tariff will thus reach its highest level in more than a hundred years. It is estimated that Trump's trade tariffs will cause the growth of the American economy to be 2 percentage points lower than expected. Several economists are even already taking into account that a recession is coming. The economic damage could become even greater if a trade war breaks out after countermeasures from other countries.

Shelter from the storm
Usually, the dollar is a good place to hide when a storm is brewing in the investment world. This time, however, there is no sign of that. In fact, the Dollar Index – which measures the currency's price movements against a basket of other currencies – had its worst day since November 2022 last week. Trump will not mind, because he prefers a weak currency that strengthens the international competitive position of American companies. An important reason for the dollar pain is that the United States is at the center of the financial storm. On Wall Street, stock prices initially fell relatively sharply. Foreign investors are selling American shares and moving their assets back to the home market. As long as Trump continues to stoke the fires of trade, investors will not find their way back to the American stock exchange anytime soon.

Hard measures
But there is more going on with the dollar. Traders are betting that the US policy rate will fall further than initially anticipated. According to data collector CME Fedwatch, economists expect the Federal Reserve to lower its key interest rate by four or five notches. Last week, it seemed that it would only be two or three notches. A lower interest rate makes it less attractive for parties to hold their assets in dollars. Incidentally, it is by no means a foregone conclusion that the US interest rate will actually fall. Higher import tariffs will probably lead to higher retail prices for all kinds of items. Fed Chairman Jerome Powell has already proven that he is prepared to take tough measures if necessary to push down higher inflation.

Very strange
The euro has risen about 6% against the dollar since mid-January. But the biggest winner of the current market storm is the Swiss franc. Switzerland’s neutral stance, conservative central bank policies and strong financial sector have always made it a safe haven. With the policy rate at just 0,25%, there is much less room for rate cuts than in other countries. In addition, the Swiss central bankers will not meet until June to decide on interest rates. It would be very strange if the policy rate fell to or even below zero before then. Although: after Liberation Day, there are more things that suddenly go very strangely.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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