European Stoxx futures are down 1.3% and S&P 500 futures have fallen 0.9% as market participants react to President Trump’s announcement of a 10% US import tariff targeted at Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland, reports Derek Halpenny, FX analyst at MUFG.
USD Weakens Amidst Rising Trade Tensions
The new tariffs are set to take effect on February 1st and will escalate to 25% on June 1st, remaining in place until a deal is reached for the US to complete the “total purchase of Greenland.” While the currencies of the affected nations initially opened weaker, the US dollar has since seen renewed weakness throughout the Asian trading session, driven by a potential resurgence of the “sell America” trade.
Halpenny notes that this tariff escalation must be viewed alongside other critical developments, specifically the upcoming decision on a new Federal Reserve Chair and a possibly imminent Supreme Court ruling on the legality of using the International Emergency Economic Powers Act (IEEPA) to implement global reciprocal tariffs.
A plausible scenario exists where these additional factors further undermine the dollar, reinforcing the view that global investors may either sell US assets or reduce US dollar exposure through increased hedging. Given the European focus of the tariffs, it is unsurprising that the Swiss franc is outperforming as the premier safe-haven currency. The Japanese yen has also strengthened today, potentially reflecting an increased risk of intervention following last week’s rhetoric signaling potential yen-selling action.
Halpenny suggests that the sell-off in the dollar (with the DXY down just 0.3%) is likely being contained by the fact that the tariffs are not effective until February 1st. Investors remain aware of the potential for President Trump to back down if some form of “deal” can be negotiated. However, this scenario becomes less likely if Europe retaliates. The EU is considering activating a suspended plan to impose tariffs on €93 billion worth of US goods if Trump proceeds with his threat. Furthermore, President Macron is advocating for the use of the EU’s anti-coercion instrument, which would grant the bloc powers to act beyond traditional trade tariffs.
