Investing.com – Volatility in the U.S. dollar following conflicting signals about the Trump administration’s plans for tariffs suggests that, at least in some ways, Trump’s second term is likely to resemble his first, according to Capital Economics.
The U.S. dollar fell sharply on Tuesday after reports that many of the executive orders the new president will sign do not include an immediate increase in U.S. tariffs. A few hours later the dollar bounced back after Trump suggested he would impose 25% tariffs on China and Mexico in February.
“The first, and most obvious, point is that this is unlikely to be the last such episode during Trump’s second term,” Capital Economics analysts said in a Jan. 21 note, “with this pattern of leaks and contradictions familiar from the U.S.-China trade war 2018-19.”
“As was the case then, the uncertainty surrounding Trump’s intentions is likely to result in plenty of short-term volatility in currency markets.”
One key implication of the moves is that some expectations of higher tariffs have now been discounted, Capital Economics said.
The positioning data suggests that market participants are looking very long for the dollar, online, increasing the scope for selling when there is negative news for the dollar, whether due to tariffs or other reasons.
It’s harder to argue that tariff expectations have been the biggest driver in currency markets in recent months, or that higher US tariffs are anywhere close to being fully reduced.
Instead, we think the main driver of the dollar’s strength was more prosaic: a rebound in U.S. economic data from recession fears in the third quarter, combined with bad news in Europe and China, caused interest rate spreads to shift in favor of the NAS.
Still, our working assumption remains that Trump will impose heavy tariffs on China later this year, “which is why we predict it will be one of the worst performing currencies this year.”
