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Risk appetite has recovered after Trump imposed a 90-day pause on his high reciprocal tariffs for all countries except China. Market pushback on the tariffs had been immense with several US companies withdrawing their earnings guidance before Trump made a U-turn, which helped triggered a 10% rally in the S&P500 from its lows. The DXY also recovered back towards 103, but the best performers were the risk-sensitive AUD (+3.0%) and NZD (+1.9%), while safe havens CHF (-1.0%) and JPY (-0.9%) saw the largest declines. Whether Trump will relinquish sweeping reciprocal tariffs is difficult to say, but a 90-day pause does provide a runway for face-saving negotiations to occur and should arrest a further deterioration in market sentiment. Meanwhile, other product-specific tariffs including those on autos, steel, and aluminium are maintained.
An exclusion of China from the tariff pause suggests a breakdown in negotiations between US and China. China has retaliated with an additional 84% tariff on US goods yesterday, while Trump also raised the tariff on goods from China to 125%. Following a recovery in risk sentiment, USD/CNH has eased back towards 7.36, but markets are closely watching whether China would allow a softening in the RMB to cushion tariff shocks. A large RMB depreciation would be too unsettling for markets and China’s trading partners, and we do not see that outcome as likely. Maintaining goodwill with trading partners could be more important at this stage, with the US seeking to re-write global trade rules that could disadvantage China’s position in global supply chains.
Without discounting the relief from the tariff pause, Trump’s open desire to bring down the US trade deficit by tariffs poses longer-term questions over the USD’s position as a reserve currency. If foreigners’ confidence in the reliability of the US as a trading partner is shaken, could their confidence that the US will make good on its financial obligations without hindrance be unmoved? After all, the corollary of the US trade deficit is an acquisition of US. financial assets by foreigners. Reallocation out of dollars into other reserve currencies such as EUR and JPY may be longer-lasting, even if reciprocal tariffs are temporary.
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