USD: Reciprocal tariffs seen as 'unworkable' - ING

The US Dollar (USD) is a little weaker in Europe today on the back of slightly lower US interest rates, ongoing optimism about an end to the war in Ukraine, and a US reciprocal tariff package which was hard to decipher. The market knew that the Commerce Department was due to deliver a big report on trade in April and had expected tariffs thereafter. But it had also feared that this week's reciprocal tariffs announcement would be a separate workstream and be more immediate. News yesterday effectively laying the groundwork for the April report has therefore been seen as a relief, ING's FX analysts Chris Turner notes.

Short-term momentum can carry DXY to the 106.35 area

"Reading through the details of the basis on which reciprocal tariffs will be delivered is mind-blowing. Each country's reciprocal tariff will be based on a relative analysis of: import tariffs, VAT rates, subsidies, regulatory burdens, FX misalignment, and 'any other practice that.. imposes any unfair limitation on market access or any structural impediment to fair competition with the market economy of the United States'."

"However, the outcome is likely to be perhaps some eye-wateringly large tariffs against some of the key countries with which the US runs a goods deficit. The EU will certainly be in the cross-hairs since it looks like Trump is using the threat of tariffs as leverage against the EU's digital service tax. We think the dollar will move a little stronger into the second quarter. This means the current dollar dip should be a correction rather than a meaningful new trend."

"For today, we think the dollar can stay soft as the focus switches to the security conference in Munich and what it means for any ceasefire in Ukraine. Speculation is building that representatives from the US, Russia, Ukraine and perhaps Europe, too, could meet in Saudi Arabia at some stage. A soft, weather-related January US retail sales figure today does not need to hit the dollar too hard. But we think short-term momentum could carry DXY below 106.95/107.00 to the 106.35 area."