USD drops as Trump moderates tariff threat - Scotiabank

The US Dollar (USD) is down for a second trading session in a row. I noted last week that broad dollar gains were looking stretched, with the DXY trading some two standard deviations above its estimated fair value, based on short-term rate spreads, Scotiabank's Chief FX Strategist Shaun Osborne notes.

USD dips to remain well supported in the weeks ahead

"That situation persists and may be acting as a restraint on the USD. The week ahead is likely to reaffirm the US exceptionalism narrative surrounding the USD's recent strength, however, so scope for losses may be limited. Key calendar risks this week take the form of Wednesday's December FOMC minutes--a 'closer call' on the policy hike decision where one policymaker dissented should make for a somewhat hawkish read on the outlook-- and Friday's NFP data should reflect a still resilient US labor market."

"USD losses are picking up in early trade, however, following reports in the Washington Post that President Trump is mulling a 'universal tariff' only on 'critical imports'. That represents something of a downgrade--perhaps- on the pre-election threat of broad-based tariffs. The CAD was a top-performer in overnight trade but has ceded that spot to the MXN following the tariff report headlines. Stocks have welcomed signs that trade risks might be dialed back. European automakers' share prices are rising."

"'Rightsizing' the USD's value to its estimated fair value (105 currently) would reflect a decent correction in the DXY's late 2024/early 2025 rally (retracement supports sit at 105.95/104.85). Healthy yield spreads, USD-positive seasonals through Q1 and other USD-supportive aspects of the Trump 2.0 platform suggest that USD dips will remain well supported on dips in the weeks ahead."