President Trump’s tariffs have continued to wreak havoc in financial markets. Major stock indices continued to tumble into this week as investors concerns grow over a slowdown in the global economy (albeit we’ve seen a bit of a rebound so far today).
The perceived ‘safe haven’ currencies (e.g. the Japanese Yen and Swiss Franc) have been in heavy demand due to the high levels of uncertainty. Furthermore, after the initial large selloff in the USD last Thursday, the US currency has since rallied back as the sharp selloff in stock markets and risk assets boosted the safe haven appeal of the Dollar.
Yesterday, China announced proposed counter tariffs of 34% and vowed to “fight to the end”, despite Trump’s warning of another 50% tariff should they not withdraw this countermeasure. The EU has taken a less aggressive approach and appears open to negotiation, while also floating the idea of potential 25% tariffs on some US goods. Interestingly, the Euro has so far been quite resilient to the tariff news even though their economy is heavily exposed to these import taxes which currently stand at 20%. Some analysts are arguing this is because the Euro is emerging as a de facto safe haven given the currency’s high liquidity and the bloc’s solid current account surplus.
Surprisingly, Sterling has been among the worst performing major currencies (particularly against the Euro). We would expect the UK to be relatively isolated from the tariffs given its low exposure to global demand (particularly the US and China) and the fact they’ve been set at the lowest level of just 10%. However, investors appear to be punishing the Pound due to its high-risk status and elevated interest rates, which would allow some room for aggressive rate cuts if the Bank of England ever pressed the panic button on the growth outlook.
As a result, the GBP/USD has fallen nearly 5-cents from last Thursday’s high and now trades around a 1-mth low. The GBP/EUR has fallen 3.5-cents since the tariffs announcement and trades around the lowest levels since August. The EUR/USD has swung wildly and is currently trading 2-cents down from last Thursday’s high and around a cent higher from pre-tariff announcement levels.
Markets are extremely sensitive to any tariff news and currencies will likely remain very volatile as further headlines come in on any retaliatory measures and the state of negotiations.
