USD falls as Trump moderates tariff threat – Scotiabank

The US Dollar (USD) declines for the second consecutive trading session. Last week I noted that the dollar’s broad gains appeared to be extended, with the DXY trading about two standard deviations above its estimated fair value, based on short-term rate differentials, notes Shaun Osborne, Head of FX Strategy from Scotiabank.

USD declines will remain well supported in the coming weeks

“That situation persists and may be acting as a brake on the USD. However, next week is likely to reaffirm the US exceptionalism narrative around the recent USD strength, so the room for losses may be limited. . Key risks to the calendar this week take the form of Wednesday’s December FOMC minutes—a ‘tighter decision’ on policy escalation where one policymaker dissented should make the reading on the outlook. somewhat hardline—and Friday’s NFP data should reflect a still resilient US labor market.”

“USD losses are widening in early trade, however, following reports in the Washington Post that President Trump is considering a ‘universal tariff’ only on ‘critical imports.’ That represents something of a downgrade—perhaps — from the pre-election threat of widespread tariffs. The CAD was the best performer in overnight trading, but has given way to the MXN following headlines from the tariff report. “Trade risks could be reduced. Share prices of European automakers are rising.”

“Adjusting the value of the USD to its estimated fair value (105 currently) would reflect a decent correction in the DXY rally in late 2024/early 2025 (retracement supports sit at 105.95/104.85).” Healthy yield spreads, positive seasonal trends for the USD during the first quarter, and other USD-supportive aspects of the Trump 2.0 platform suggest that the declines in the USD will continue to be well supported in the coming weeks.”