Over the past 24 hours, the foreign exchange (FX) market has experienced heightened volatility, largely driven by escalating global trade tensions—most notably the intensifying tariff war between the United States and China. U.S. President Donald Trump’s latest round of broad-based import tariffs, aimed at curbing China’s trade surplus and addressing alleged intellectual property violations, has reignited fears of a full-scale global recession. In retaliation, Beijing has hinted at imposing its own countermeasures, escalating uncertainty and further disrupting investor confidence across global markets.
In response to the mounting uncertainty, investors have sought refuge in traditional safe-haven assets. The Swiss franc appreciated notably, with the U.S. dollar falling to a six-month low against it—down 0.44% to 0.8572 francs. The Japanese yen also strengthened sharply, highlighting the global flight to safety. The yen's rally was bolstered by growing concerns over China's economic trajectory amid the tariff standoff and the broader implications for East Asian markets.
This shift in investor behaviour underscores a deepening aversion to risk as trade rhetoric between the world's two largest economies continues to escalate. Market participants are bracing for prolonged disruptions to global supply chains and reduced cross-border investment.
GBP under pressure
The British pound came under considerable pressure, falling to a one-month low against both the U.S. dollar and the euro. Sterling declined to $1.2825—a 0.5% drop on the day—adding to a 1.5% loss recorded last Friday. The pound’s depreciation reflects investors’ concerns about the UK’s heavy reliance on international trade, making it vulnerable to ripple effects from the U.S.-China economic dispute. Fears of reduced global demand and supply chain instability are weighing heavily on the outlook for UK growth.
Increased demand for USD
Despite broader risk-off sentiment, demand for U.S. dollars surged among non-U.S. investors seeking liquidity. This trend is reflected in sharp moves in three-month cross-currency basis swaps, particularly in the euro, pound, and Japanese yen. The euro swap rate dropped to -5.375%, its lowest level since November 2023, signalling a scramble for dollar funding amid tightening credit conditions and heightened market stress.
This dynamic illustrates the paradox of the dollar’s role: while U.S. protectionist policies are a key source of current market instability, the dollar remains a cornerstone of global liquidity and a preferred currency during crises.
Central bank interventions
Amid the market turmoil, Taiwan’s central bank issued a statement asserting its readiness to intervene in currency markets to stabilize the Taiwan dollar. The central bank emphasized its robust foreign exchange reserves and its capacity to manage short-term volatility. Authorities across Asia are increasingly vigilant, fearing that persistent USD strength and yuan depreciation could lead to competitive devaluations across the region.
China's own central bank has thus far refrained from direct intervention but is closely monitoring the yuan’s exchange rate, which has faced downward pressure in recent days. A weakening yuan could further inflame tensions with Washington, potentially prompting even more aggressive U.S. trade actions.
Market sentiment and outlook
Market sentiment remains firmly risk-averse. Global equity markets have recorded steep declines, while volatility gauges such as the VIX have surged—reaching 60, the highest level since a significant market selloff last August. Traders and analysts are increasingly concerned that the U.S.-China tariff conflict may evolve into a prolonged economic cold war, with lasting implications for global trade, investment flows, and monetary policy.
With no signs of de-escalation in sight, analysts anticipate continued turbulence in the FX market. Currency movements are likely to remain reactive to geopolitical headlines, central bank policy signals, and any further retaliatory trade measures between Washington and Beijing.
