USD Tanks on Tariffs - EUR/USD, GBP/USD, USD/JPY

US Dollar Talking Points:

• The U.S. Dollar is down by more than 2% today which marks the largest single-day decline since November of 2022, shortly after the currency had topped following the Fed’s rate hikes earlier that year.
• EUR/USD and GBP/USD breakouts have run aggressively-higher, but perhaps more notably USD/JPY has put in a severe sell-off and there could be repercussions down-the-road, touched on below.
• U.S yields are down considerably, as well, with the 10-year note touching 4% for the first time in five months. That could lead to some positive developments as lower borrowing costs could support the housing market, equities and as we’ve seen this morning, pushed a stronger expectation for more rate cuts this year.

The U.S. Dollar is down dramatically today with the currency currently showing a loss of more than 2%. The last time the Greenback gave up 2% in a single session was back in November of 2022, right around the time when DXY had topped following the Fed’s rate hike campaign that year. This time, however, there have been no recent rate hikes nor are there rate hikes getting priced-in across Europe. This move has largely been driven by the shock of the tariff announcement yesterday that took place at 4pm ET, just after market close; so, the reaction that we’re seeing in stocks this morning is very much a part of that.

While tariffs had been telegraphed for quite some time, I think there were a couple of different things that took markets by surprise. The first is that they’re actually coming to fruition, as we’ve already seen a couple of pushes that stalled or delayed. Canada, for instance, was supposed to initially face tariffs on February 2^nd. That got pushed back to March and then again to April, which we’re now seeing come into play.

But perhaps more notably it’s the size of the tariffs that were unveiled yesterday that I think brought the most surprise. The tariffs seemed to be derived based on the trade deficit that the United States has with other countries and in the chart shared by President Trump at the announcement, there was a description under the column for ‘tariffs charged to the U.S.’ of ‘including currency manipulation and trade barriers.’ This would seem to point a finger at Japan as the BoJ has continued to lean on loose monetary policy to help drive growth into the economy.

Equities are pricing in that shock this morning as are a number of other macro markets, but I think most notable has been the move in bonds as the 10-year has touched 4% for the first time in more than five months. For a U.S. Treasury department that has a lot of long-term debt coming due later this year, that’s not necessarily a terrible thing. It’s also something that can support lower mortgage rates which have also been sticky of late, even with rates dropping, and that’ something that could inevitably boost the U.S. housing market.

 

U.S. 10-Year Yields

Chart prepared by James Stanley; data derived from Tradingview

 

USD

 

In the U.S. Dollar, the currency has already put in a large move for Q2 and we’re only on day three. The currency is now approaching some longer-term supports as taken from the range that build after the 2022 rally pulled back. That support rests around the 100-level on DXY and it was last in-play at the end of Q3 before DXY launched into the Q4 reversal.

 

U.S. Dollar Monthly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

EUR/USD

 

Pushing that move of weakness in DXY is a strong breakout in EUR/USD. It was just a week ago that the pair was testing the 200-day moving average, and that’s since led to a strong breakout and a fresh five-month-high.

The 1.1200 level is the next spot of significant resistance, and that’s the level that stopped bulls in their tracks in Q3 of last year. There’s a long-term Fibonacci level just above that at 1.1212, as well, but if we do see EUR/USD stretch, I’d expect a support test at the longer-term zone in DXY looked at above, around the 100-level.

For EUR/USD support, 1.1000 and 1.0943 are both now in the picture for higher-low support potential.

 

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

 

GBP/USD

 

GBP/USD has similarly broken-out on the back of this USD weakness and the pair has now pushed above the 1.3000 level. That round level is now higher-low support potential for pullbacks, and there’s also a prior resistance swing around 1.3050 that could be of interest, as well.

 

GBP/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

 

USD/JPY

 

While tariffs have certainly been a divisive topic across markets and while many economists seem to uniformly abhor the idea, I do think there could end up with a positive outcome from the entire scenario. I don’t think that what we’re seeing at this point is a mistake and I think there could be logic behind the ‘short term pain, long term gain’ strategy, especially considering the amount of Treasury debt due later this year.

With that said, the more volatility that we have the higher the probability that something goes awry, and while I wouldn’t necessarily consider another round of JPY carry unwind as a black swan, I do think it could fast become an unexpected consequence of the current approach, and this is something that could carry a heavier hammer to risk markets like equities, and especially tech stocks that have been flying high since the equity market lows of 2022.

We saw a glimpse of this last summer, when the Bank of Japan intervened on the morning of a below-expected CPI print. And after holding strong for a couple of years, suddenly, the USD/JPY carry trade was going upside down. This drove a de-leveraging event across global equity markets, and that makes sense if we think about the mechanics behind it.

With Japan keeping rates ultra low even as the U.S. lifts rates, funds can goto Japanese banks to borrow Yen at rates well-below what they could borrow (or invest) for in the U.S., but the problem then is that those borrowers are now long the Yen. They can address that with a hedge in USD/JPY and now that long-Yen risk inherent with loans from Japanese banks are now exposed to the U.S. Dollar instead. As long as Japanese rates stay low and U.S. markets continue to push-higher, this trade can remain as attractive.

But when matters begin to shift – and when there’s a massive imbalance in USD/JPY demand – the simple fear of matters going the other way can create a cascade of selling, and that’s what we saw last summer, which essentially removed leverage from other markets that was initially driven by low Japanese rates.

Now last year the dust settled fairly soon after the spiral had begun as the Bank of Japan stepped back from rate hike talk, and then as the USD reversed in Q4, USD/JPY came back to life with some headlines even going so far as to proclaim that the carry trade was back.

That didn’t really make sense from a fundamental perspective, however, as U.S. rates were heading lower and Japanese inflation remained a possible problem. But – the Yen remained weak and that allowed Japan to enjoy a trade benefit against a strong U.S. Dollar.

But now that Trump has called out ‘currency manipulation and trade barriers’ against partner countries like Japan, it may be worth asking if change is afoot there, and if we may be on the cusp of another unwind of the Yen carry trade which can bring along with it a stronger reversal in USD/JPY.

It’s still early in this scenario, and there’s likely a lot of negotiation to be seen, both between countries and through headlines, but given the surprise of how aggressively tariffs could possibly be levied, and the fact that currency manipulation was cited as a possible reason behind those tariffs, the risk of a stronger Yen has just become a more important variable to consider.

 

USD/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist