Greenback’s relief rally from US-China tariff truce is but a brief blip: analysts

[SINGAPORE] Traders rewarded the US dollar with gains against major Asian currencies after trade tensions between Beijing and Washington thawed – but the greenback could soon be singing the blues again as analysts expect the relief rally to be short-lived.

The US dollar index – which measures the greenback’s value against a basket of six major currencies: the euro, yen, pound, Canadian dollar, krona, and franc – jumped more than 1 per cent across Monday (May 12) afternoon before stabilising at around 101.6 as at early evening on Tuesday.

The US shaved its earlier tariff of 145 per cent on Chinese goods to 30 per cent on Monday after a temporary deal for 90 days was brokered during weekend trade talks in Geneva. Further negotiations are expected to follow.

The larger-than-expected tariff cuts reignited risk-on sentiment across global markets, which reacted swiftly and with much relief.

US stocks and treasury yields climbed, and the greenback and renminbi strengthened; meanwhile, investors scaled back their long positions in safe-haven proxies, such as the yen and gold, as they rotated into risk assets.

The world’s reserve currency reaped returns against its South-east Asian peers, tracking gains on the baht, ringgit, rupiah, Singdollar and Philippine peso.

The renminbi was among few currencies that rose against the greenback, charting roughly a 0.8 per cent gain before stabilising to about 7.2 yuan per US dollar as at early evening on Tuesday. Against the backdrop of weakening US dollar dominance, China’s renminbi is shaping up to be a barometer for the region’s currency swings.

Noting that “the really fascinating market moves came in the FX markets”, MUFG Bank’s senior currency analyst Michael Wan pointed out in a Tuesday report that these currency flows are not historically what one would expect in a risk-on environment.

When investors are more optimistic with a stronger appetite for risk, they would typically shift from safer assets to higher-yielding and riskier ones – which is a disconnect from prevailing market conditions.

Wan explained that these currency moves are, to an extent, a short-term reversal of earlier US dollar weakness following Apr 2’s announcement of reciprocal tariffs on what Trump has termed “Liberation Day”.

The disparity can also be attributed to partial retracing of earlier outperformance in the euro and yen, as well as previous underperformance in the renminbi.

Meanwhile, USD/Asia currency pairs were impacted by their beta, or sensitivity, to the stronger dollar.

Fragile rally

Foreign exchange (FX) pundits across the board caution that the current bout of strength is built on shaky ground.

Maybank analysts said in a Tuesday report that the further unwinding of short-US-dollar positions they observed from the tariff truce “is probably close to an end”.

DBS senior foreign exchange strategist Philip Wee cautioned in a Tuesday report against confusing the trade relief with a catalyst for the US dollar’s comeback.

“Trump’s policies have been marked by unpredictability and volatility, wielding tariffs to get concessions and pursuing significant tax cuts and industrial subsidies without a meaningful fiscal offset,” he said.

He also highlighted US treasury secretary Scott Bessent’s warning that his department could exhaust its borrowing capacity as early as in August.

MUFG Bank’s Wan echoed his sentiments.

The way he sees it, the million-dollar question on what will happen to Asian currencies against the dollar moving forward depends not just on trade deals, but also on three driving factors.

They are: continued questions over US exceptionalism; capital inflows into American equities that buoy the US dollar and hence its strength against Asian currencies; or the net impact of tariffs on global and regional Asia growth.

“While our eyes are all transfixed on the US-China trade deal at the moment, we should also not forget the upcoming US tax bill, which is in discussion now and might shift the market’s focus onto US fiscal sustainability, hence also impacting US dollar/Asia more broadly,” Wan cautioned.

Investors will also be closely watching the slew of US data releases to come this week – though HSBC analysts are not as concerned.

US consumer prices for April are due to come in on Tuesday; retail sales, producer prices and industrial production figures will be released on Thursday; housing starts for April, and building permit numbers will be announced Friday.

“Even if some of the hard data surprises negatively in the coming weeks, markets may well shrug that off as being driven by the ‘pre-China-tariff’ world and, thus, no longer relevant,” said the house’s strategists in a Monday report.

“Continued resilience in the hard data or even upside surprises on the other hand would likely be taken as a positive – a classic win-win situation,” they added.