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US assets had rebounded on the back of improving risk sentiment stemming from a US-China trade truce. Despite substantial gains in US stocks, the USD’s recovery has lacked vigour, with DXY still hovering around 100. Why? The USD remains highly overvalued, and support from US exceptionalism is also fading in the face of Trump tariffs. Also, there is speculation that the US may negotiate with its trading partners for an appreciation of their currencies against the USD to rebalance trade.
USD/KRW dipped below 1400 yesterday after Korea confirmed on Wednesday that currency talks with the US took place. It was somewhat surprising given that just a week ago, Taiwan had denied that currencies were part of trade talks with the US. Bloomberg now reports that US officials will not seek to include currency policy pledges in trade deals, adding that only Treasury Secretary Bessent has the authority to address currency issues, and he is not deputizing this to other officials. To be clear, Bessent has on many occasions stated that the US will maintain a strong USD policy. Thus, it seems that market-determined exchange rates should continue to be a principle that underpins US economic policymaking, including trade negotiations.
Even without US prodding, there are questions over structural USD sales due to hedging needs from Asian insurers with a large stock of overseas USD assets. Given this, USD/JPY has been easing towards 145, despite BOJ previously signalling a likely slower pace of policy normalization. Indeed, Japan’s Q1 GDP growth today has underwhelmed expectations, coming in at -0.7% q/q ann (vs 2.4% in Q4). Japanese activity could be further weighed in Q2 due to US tariff uncertainty, as well as news of job cuts for a major auto manufacturer.
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