Written by the Market Insights Team
Don’t call it a comeback yet
Kevin Ford – FX & Macro Strategist
When markets get shaky, investors usually turn to gold for stability, and in FX, the US dollar has long been considered the go-to safe haven. Other safe havens include the Japanese yen and Swiss franc. But following April 2nd, market behavior has taken an unexpected turn, marked by widespread bearish sentiment toward the greenback—a reaction that few could have predicted.
Leading up to April 2nd, it was widely assumed that tariffs would boost the dollar. Given its reputation as a safe-haven currency and by the direct impact tariffs were expected to have on the US economy through higher prices, many anticipated a stronger dollar. However, this safe-haven status seems to have been undermined by a lack of confidence in US policymaking. To make matters worse, the weaker dollar won’t soften the blow of tariffs; instead, it’d exacerbate inflationary pressures by driving up the cost of imported goods.
So, who’s gaining from the dollar’s surprising weakness? The Canadian dollar has seen an uptick, reaching its highest value since December. Wednesday’s tariff announcements triggered a US dollar sell-off, offering some support to the CAD. That said, don’t call it a comeback yet. Canada remains under pressure from levies on steel, aluminum, and auto tariffs, leaving the CAD lagging behind other G-10 currencies since the tariff announcement. If these tariffs persist, they could weigh heavily on the CAD over the medium to long term, given Canada’s strong trade ties with the US. After reciprocal tariffs announcement, the Loonie traded as low as 1.4028, approaching its 200-day SMA, but has rebounded as high as 1.4209.
In the midst of all this, we may be approaching the peak of policy uncertainty. While tariffs are likely here to stay for a while, many investors remain hopeful, viewing them as both structural components of US trade policy and tools for negotiation, with their effects on growth and inflation expected to be more of a one-time shock than an ongoing issue. Nevertheless, equity markets continue to struggle with the fallout from tariff-related disruptions, reflecting widespread investor unease and heightened market volatility. The VIX has reached a new 2025 high of 41, signaling extreme and alarming fear levels not observed since last summer’s growth scare, which was triggered by the unwind of the Japanese yen carry trade.
Meanwhile, attention is now shifting to the upcoming non-farm payrolls report, which is expected to show a slowdown in job creation—140,000 jobs added in March compared to 151,000 in February. A weaker-than-anticipated report could deepen concerns, further dampening sentiment not only on Wall Street but across global markets.
Worst day for US stocks and dollar in years
George Vessey – Lead FX & Macro Strategist
Equities, treasury yields, the US dollar and oil have all felt the brunt of the tariff announcement, as investors bet that Donald Trump’s sweeping tariffs would result in pain for the US economy and the global trade system.
US equities came under intense pressure, with benchmarks suffering their biggest daily drops since the height of the Covid pandemic in 2020. The US stock market is now down over 10% since Trump took office – the worst 10-week start under a new president in 24 years. Oil plunged 6% due to fears a global trade war could slow economic growth and reduce fuel demand, hurt further when OPEC+ countries unexpectedly announced they would increase oil production more than planned.
The dollar index dropped over 2%, its worst day in almost ten years and to its lowest level in six months. The dollar is being sold against the big, liquid defensive currencies of the Japanese yen and Swiss franc as well as the euro and pound. This will aggravate the impact of the levies on US consumers. The currency will be one key price to watch to gauge the extent of economic discomfort the US can withstand before it potentially decides to soften its approach.
For now, the market is repricing the US economy and the dollar the most, but the path ahead is neither linear nor obvious. One reason being that the global policy response will determine whether the dollar ends up weakening further or rebounding eventually. Europe, in particular, has argued that a combination of trade, tariff and subsidy measures may be an appropriate response. This could offset the tariff effects in a growth-enhancing way, and support the euro, hence EUR/USD’s over 2% rally on Thursday. But as compelling as the sell-US narrative appears based on the price action of the past month and week, it might be unwise to chase beyond the near term. indeed, a US recession will reverberate globally, and could support demand for the world’s reserve currency.
In response to the tariff news and rising recession risks, traders increased their bets on Federal Reserve rate cuts. Three to four quarter-point reductions are priced for this year, with the first cut likely in June. On the data front, the ISM services PMI fell sharply to 50.8 in March from 53.5 in February. The reading pointed to the softest expansion in the services sector since June last year. The Challenger report showed that US companies cut the most jobs since 2020 in March, largely due to the DOGE layoffs. The jobs report today will provide further clarity on the labour market performance.
It’s the euro that’s been “liberated”
George Vessey – Lead FX & Macro Strategist
The euro jumped more than 2% versus the dollar yesterday and sits above $1.11 today, its highest level since early October 2024. It was EUR/USD’s biggest daily jump in about five years, benefiting from general dollar weakness as traders react to the latest batch of tariffs announced by President Trump.
The move puts it at odds with the move in Germany’s front-end bonds, though overnight indexed swaps assign some 70% chance of an ECB rate reduction on April 17 down from 90% earlier this week. Germany’s two-year yields are down 11 basis points, and are likely to stay lower as the EU works out its response to US tariffs.
The dynamics in the currency market highlight that tariffs ultimately fall on domestic consumers and businesses, with the economic damage to the US likely surpassing the impact on the EU from reduced exports. Although a global trade war would typically weigh on the euro, the vulnerabilities in the US economy are currently the driving force for EUR/USD, but for how long?
A steep decline in US equities, alongside further drops in US yields, continues to erode the narrative of US economic exceptionalism. A move towards $1.12 cannot be ruled out assuming the market prices European retaliatory measures, including subsidies, that blunt the tariff effects, meaning EUR/USD converges to real rate differentials.
Pound (and penguins) stand proud
George Vessey – Lead FX & Macro Strategist
The British pound’s tariff resilience was in evidence in the UK’s lower tariff rate, which underpins the potential for sterling to outperform versus peers. GBP/USD accelerated higher once breaking above the $1.30 barrier to peek above $1.32 briefly and clock one of its biggest daily gains in over a year. But against the euro, the pound dropped 1% because EUR/USD rose over 2% on the day.
In terms of the UK, the good news is that it’s been slapped with the lowest possible tariff of 10%. This is mainly because the UK doesn’t export more goods to the US than it imports. Bizarrely, the president also imposed 10% tariffs on dozens of tiny territories including Heard and McDonald Islands, that are inhabited only by penguins and seals. It seems nowhere on Earth is safe. Still, the 10% on the UK looks better in relative terms – which is one reason why the pound surged over 1% higher yesterday. Moreover, business groups have strongly welcomed the UK government’s decision not to announce immediate retaliatory tariffs against the US, but to instead keep talking about a trade deal that might lead to tariffs being removed. Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices.
Meanwhile, traders added to bets on further monetary easing globally, including in the UK, where money markets now imply over 60 basis points of Bank of England (BoE) interest-rate cuts over the remainder of 2025 from around 53 basis points Wednesday. Separately, the BoE’s Decision Maker Panel survey for year-ahead inflation expectations rose to 3.4% in March from 3.1% in February.
Equities, oil, dollar, yields – down down down down
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 31- April 4
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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