Dollar Poised for Rebound Amid New Tariff Push
Following its steepest weekly decline in months due to softer tariff rhetoric, the dollar appears set for a recovery. Treasury Secretary Scott Bessent announced plans to advocate for new universal tariffs on U.S. imports, starting at 2.5% and increasing gradually. This policy shift is expected to sustain uncertainty, dampen risk sentiment, and boost the USD alongside heightened market volatility.
Nvidia, a leading beneficiary of AI chip investments, saw its shares plummet by approximately 17%, erasing nearly $600 billion in market value—the largest single-day loss for any company. Traditional safe-haven currencies, such as the Japanese yen and Swiss franc, climbed nearly 1% against the US dollar as risk aversion spread from equities and bonds into the FX markets. Persistent concerns over AI investments, compounded by Trump's latest tariff threats, have continued to weigh on risk sentiment.
Euro Rises Amid AI Disruption and Positive Economic Signals
Cautious optimism is emerging among euro buyers as the currency benefits from a mix of AI-driven market upheaval and improving European economic data. The “DeepSeek shock”—an announcement of a ground-breaking AI spinout from Zhejiang University, featuring an open-source model outperforming industry leaders at lower costs—sparked a broad sell-off in U.S. equity markets.
Typically, such risk-off sentiment would drive investors toward safe-haven currencies like the Swiss franc and Japanese yen, both of which gained against the euro. However, EUR/USD defied expectations on Monday, climbing above the $1.05 mark for the first time this year. Investors appear to be rethinking the “U.S. equity exceptionalism” narrative, redirecting flows away from the dollar despite falling stock prices.
Adding to the euro’s momentum, European macroeconomic data continues to show signs of stabilization. Recent indicators, including PMIs and the Ifo index, have exceeded forecasts over the past two sessions. The Ifo Current Conditions Index notably rose to 86.1, its highest reading since August 2024.
Despite these encouraging developments, the euro’s potential for further gains remains limited. Weak economic growth prospects and escalating trade tensions could constrain its upside in the near term.
Pound Weakens Amid Risk Aversion and Domestic Inflation Concerns
The British pound, a risk-sensitive currency, has faced renewed selling pressure this week against safe-haven peers such as the USD, JPY, and CHF. GBP/USD recently broke above the downtrend line that had guided trading since last October but encountered resistance at its 50-day moving average. While the pair remains about 3% above its 1-year low, it is over 7% below its 2024 peak.
On Monday, both the pound and the euro gained ground against the dollar despite the "DeepSeek shock" disrupting market sentiment. However, by Tuesday, renewed tariff threats from Donald Trump caused both currencies to underperform the dollar.
Domestically, UK food prices surged at their fastest pace in nine months at the start of 2025, according to British Retail Consortium data. This development intensifies inflation concerns ahead of next week's Bank of England meeting, keeping stagflation fears alive. This has contributed to a recent decoupling between rising gilt yields and the pound’s performance, further weighing on the currency.
