MW The U.S. dollar slumps as Trump 2.0 kicks off with no immediate tariffs
By Christine Idzelis
'Even if tariffs are delayed, they are likely to be a key policy pillar for the new administration,' says BofA
The U.S. dollar weakened on President Donald Trump's Inauguration Day, and remained under pressure Tuesday after it became clear immediate tariffs weren't in the cards, according to BofA Global Research.
With "no trade-deficit emergency" declared in Trump's inauguration address Monday, the U.S. dollar saw "only a partial reduction in risk premium" as no immediate tariffs were announced, BofA Global Research strategists said in a rates and currencies note Tuesday. "Some risk premium is likely to sustain as there remains uncertainty around the timing of tariff increases."
Investors are monitoring Trump's tariff policy for details that will help them assess potential ripple effects on inflation as well as economic growth in the U.S. and internationally.
BofA tracked the gap between the dollar and its level implied by the differential between the 2-year U.S. Treasury rate and the 2-year rate on sovereign bonds from countries whose currencies are part of the ICE U.S. Dollar Index. Such differentials are viewed as a key fundamental driver of currency moves, with investors generally favoring the currency with the higher or rising yield. Dollar strength beyond what can be attributed to moves in the rate differentials is commonly interpreted as a reflection of a "tariff risk premium," according to the strategists.
The dollar's Monday drop appeared to reflect a partial unwinding of that premium, the strategists wrote (see chart below).
"It seems sensible for the market to retain some tariff risk premium," said the BofA strategists. "Even if tariffs are delayed, they are likely to be a key policy pillar for the new administration."
In his inaugural address, Trump declared a national emergency on the southern border as well as a national energy emergency, but he did not announce any new tariffs. Concerning trade, he later told reporters at the Oval Office that his administration was considering imposing 25% tariffs on Mexico and Canada on Feb. 1, as MarketWatch's Victor Reklaitis and Robert Schroeder reported.
See: Trump's Day 1 executive orders target EVs, inflation, immigration. Here's what could come next.
The U.S. dollar was softening Tuesday. The ICE U.S. Dollar Index DXY, a measure of the greenback against other major currencies, was falling 1.2% Tuesday afternoon for a year-to-date decline of around 0.4%, according to FactSet data, at last check.
The bigger risk for U.S. dollar bulls in the near term is that a continued selloff risks triggering an unwinding of positions among commodity trading advisors, the BofA strategists said, pointing to the greenback's "proximity to CTA stop-loss levels" after its recent selloff.
Still, the greenback is up around 4.6% over the past 12 months based on Tuesday afternoon trading levels, FactSet data show.
UBS Global Wealth Management said in a Jan. 14 note that it expected the dollar to remain "stronger for longer" in the first half of 2025, citing U.S. economic activity that will likely "stay robust amid ongoing tariff worries for the rest of the world."
The U.S. stock market was rising Tuesday afternoon as Treasury yields fell during the first day of trading under Trump as the 47th president. The Dow Jones Industrial Average DJIA was up 1.1%, while the S&P 500 SPX gained 0.8% and the Nasdaq Composite COMP rose 0.6%, according to FactSet data, at last check.
In the bond market, the yield on the 10-year Treasury note BX:TMUBMUSD10Y was down about 4 basis points Tuesday afternoon at around 4.57%, while the 2-year Treasury rate BX:TMUBMUSD02Y was about flat at around 4.28%, according to FactSet data, at last check.
-Christine Idzelis
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January 21, 2025 15:09 ET (20:09 GMT)
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