With Trump Tariffs Looming, Investors Are ‘Running Away’

Strategists claim that the implementation of U.S. President Donald Trump’s tariff regime is depressing investor sentiment toward the dollar and driving them to trade foreign exchange (FX) abroad.

On Wednesday morning (April 2), there was minimal movement in the dollar index, which compares the value of the US dollar to a basket of significant competitors. The U.S. currency started to increase strongly in late 2024 and reached its top in mid-January, but in recent weeks, the dollar index has gradually reduced some of those gains.

Because it is the world’s reserve currency and dominates international borrowing, payments, and commerce, the dollar has long been seen as a safe haven asset for investors. Imports are less expensive and U.S. exports are more expensive as the currency appreciates. The value of the dollar can also affect capital flows, company profits, and international monetary policy.

As the U.S. is ready to start a global trade war, currency traders are growing more bullish on the currencies of its main trading partners and less bullish on the dollar, according to a research paper released by Joseph Brusuelas, chief economist at RSM U.S.

According to the paper, most euro positioning was long the dollar from late October 2024 and the first week of March this year. However, net positioning has been long the euro for the past three weeks.

By the end of the year, strategists predict that the euro will have dropped to between $1.06 and $1.07 before rising to $1.12 or above. In fact, once they are aware of the specifics of the tariffs, they anticipate that the market will price in “maximum suffering.”

Once fully priced in, tariffs are unlikely to worsen, and the EU and others [are expected] to respond with their own retaliatory tariffs, which will eventually cause a rebound.

Despite anticipating that tariffs would immediately boost the value of the dollar, Athanasios Vamvakidis, global head and managing director of G10 FX strategy at Bank of America, stated in a recent interview with CNBC that he expected negative ahead for the dollar.

“For the dollar we have been and we are still bearish for the year as a whole,” he said on a call. “We believe the market is already pricing selective tariffs, but it will get tariffs across the board.”

He said, the dollar could rally this week in the immediate aftermath of tariffs coming into effect, but noted that this “most likely will be an opportunity to sell.”

“First, when you have the U.S. against the rest of the world in a trade war scenario, then the U.S. eventually will suffer more because … when you compare it with the rest of the world, the rest of the world is larger. Second, tariffs suggest stagflationary risks — and right now, the market is very concerned about such risks.”

According to Vamvakidis, his team predicts that the euro will hit $1.15 this year and $1.20 in 2026.

Vamvakidis of Bank of America also contended that the British pound might appreciate when Trump’s tariff policy takes effect, pointing out that the US president has threatened to impose taxes on the EU while implying that Britain might be exempt.

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Analysts at Maybank upwardly upgraded their predictions for the British pound at the end of March, stating that they now see sterling reaching $1.26 by year’s end and then increasing to $1.31 in early 2026. The value of the British pound was approximately $1.29 in relation to the US dollar on Wednesday morning.

“Both Australia and New Zealand also have stronger balance sheets than most other Western countries — in particular much lower debt to GDP ratios,” Alex King, a former FX trader and founder of personal finance platform Generation Money, said via email.

“This means they have much more headroom for potential stimulus measures of their own and [it’s] another factor making them both attractive places for investors, which helps strengthen their currencies.”

He added that both countries’ economies were “much less connected to the trade war narrative.”

Credit: CNBC News