Dollar weakens as tariff concerns ease – Scotiabank

President Trump’s comments at the WEF in Davos yesterday contained much of the same as his recent statements: tax cuts, lower oil prices, and a demand that interest rates be lowered ‘immediately.’ The tariffs got some airtime, but the lack of details remains a drag on the performance of the US dollar (USD), notes Shaun Osborne, Chief FX Strategist at Scotiabank.

USD falls as President Trump softens China tariffs

“Furthermore, the president commented last night that he would ‘prefer not’ to have to impose tariffs on China, which caused a further drop in the USD. Markets have been holding significant long positions in USD and the rise in the USD around the presidential election was was largely due to the expectation that broad and aggressive tariff actions would be imposed on major US trading partners from day one. The more nuanced approach to tariffs is causing a tightening of positions, and there may be. more to come.”

“Major currencies are showing broad gains against the USD today with the DXY showing a 1.6% loss for the week, its biggest drop since a similar drop in late August. Technical indicators are leaning bearish for the DXY, suggesting “The index could decline another 1% or so in the short term. The SEK, ZAR and MXN lead the day’s gains, with the EUR also posting a solid rise, aided by Eurozone data.”

“Shelters such as the CHF and JPY are lagging, with the Japanese currency more or less flat on the session despite the BoJ delivering the expected 25 basis point rate hike earlier (to 0.5%, the highest since 2008) The BoJ improved its view on the strength of inflation, keeping the door open for further adjustments ahead. Before the decision, Japan reported a higher-than-expected CPI for December. (+3.6% YoY). Tighter spreads should help maintain a firm cap on USD/JPY around the 160 point level, but spot gains may be limited by the fact that the USD is trading a bit lower. below our fair value estimate (157) currently.”