The European Stoxx fell 1.3% and the S&P fell 0.9% as market participants responded to President Trump’s announcement of a 10% US import tariff against Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands and Finland, according to MUFG FX analyst Derek Halpenny.
The dollar weakens amid escalating trade tensions
“The tariff is effective from February 1st and will rise to 25% on June 1st. The tariff will remain in place until an agreement is reached on a ‘full and complete purchase of Greenland’ by the US. Initially, currencies affected by this announcement opened weaker but during the Asian trading session, the view was that there may be a return to a ‘sell America’ trade and the dollar saw some renewed weakness. This tariff escalation must be viewed in the context of other developments, in particular the upcoming decision on a new Fed President and the likely imminent decision of the Supreme Court on the legality of using IEEPA to implement reciprocal tariffs globally.”
“There is a plausible scenario in which these additional factors also undermine the dollar, thus strengthening the view that global investors will either sell US assets or look to reduce their exposure to the US dollar through increased hedging. Given that the affected countries are all European, it is not surprising that the Swiss franc saw the largest outperformance on safe haven flows. It remains the most reliable currency for safe haven flows. Even the yen rose today which may partly reflect increased intervention risk following last week’s crisis. Yen.”
“What will contain the dollar sell-off (DXY -0.3% only) is the fact that these tariffs only take effect on February 1, and investors will be aware of the possibility that Trump will back away from some form of ‘deal’ that has been made. However, this scenario becomes less likely if there is retaliation in Europe. The EU is considering imposing tariffs on €93 billion worth of goods if Trump carries out his threat. This relates to a previous plan that has been put on hold and therefore could Activating it President Macron wants to push ahead with the EU’s anti-coercion instrument, giving the EU room to act beyond trade tariffs.
