March 04, 2025 at 07:10PM
It’s turning into a big day in Europe despite moves from the US that make April 2 tariffs in the EU much more likely. The pound has also risen sharply and is making fresh session highs.
Deutsche Bank was out with a note today highlighting their surprise at the weakness in the US dollar this year in light of the risk off environment and huge uncertainty in the global economy.
We would not have expected these market moves at the start of the year.
There is no question in our mind that a recession
in Canada and Mexico is now likely if these tariffs persist and that global
growth risks are rising sharply. Large tariffs on Europe will be unavoidable if
the competitiveness of US-based North America supply chains is to be
maintained. And there is also no question that the geopolitical backdrop in
Europe is more precarious than it was a month ago. Yet why is the dollar
weakening?
They highlight two reasons:
1) The US fiscal stance is tightening. They highlight that lower US spending along with tariffs are bullish for bonds and indicate a slowing economy, something that we’re starting to see in the data.
2) The US dollar losing its safe-haven status.
I’ll quote this directly:
We
do not write this lightly. But the speed and scale of global shifts is so rapid
that this needs to be acknowledged as a possibility. We highlight a few
developments since the start of the year providing tentative signs in this
direction. First, the declining correlation between the US dollar and risk
assets which has been at the core of portfolio construction for many real money
investors over the last decade. Second, the unusual
and simultaneous outperformance of both high and low beta currencies, with
the common denominator being cheap valuations versus the USD. Third, the stark
relative underperformance of US risky asset valuations versus the rest of the
world going back three decades despite highly elevated global uncertainty.
Fourth, the US current account deficit breaching
the 4% threshold in recent months which has historically marked the limits
of dollar overvaluation.
That’s a big theme to think about and I think it’s strongly worth considering given the look of today’s EUR and GBP charts. Of course, I wouldn’t underestimate the huge spending proposals from Germany today as a European catalyst.
This article was written by Adam Button at www.forexlive.com.
