USD: Tariffs are dollar positive, an equity correction is not - ING

During President Trump's first term in office, we felt the sequencing of tax cuts (late 2017) and then tariffs (March 2018-August 2019) were key reasons for a strengthening dollar. In other words, the US economy had some fiscal support before tariff wars were waged. What seems to be the case today is that Washington is engaging in protectionism very early in its new administration without the domestic back-up, ING's FX analyst Chris Turner notes.

Tariff story can keep DXY support at 106.15/35 intact

"Where the USD trades near term may be a function of what happens to US equity markets. 25% tariffs on major trading partners may come as something of a shock and historically trade wars have been bad news for equities. It would be no surprise now for investors to adopt more defensive positioning, which would see the Japanese yen and Swiss franc continue to outperform on the crosses. Should US equities take a turn for the worse, we could then also see USD/JPY and USD/CHF turning lower in outright terms too."

"The implementation of tariffs today also serves as a reminder that Washington requires tariff revenue for its fiscal agenda. That may suggest today's tariffs are slow to reverse and may well be broadened into universal tariffs in April. Expect President Trump to outline such an agenda today when he delivers a speech to a joint session of Congress at 21ET. With tariffs so central to his agenda of bringing higher-paid manufacturing jobs back to the US, this will remain a very difficult environment for currencies backed by commodity exports or with very open economies."

"Ultimately, we still think the dollar will broadly strengthen in the first half of the year, but it's going to be a bumpy ride. DXY is heavily weighted to European FX, which is being buffeted by both tariff news and plans for aggressive defense spending in Europe. It's a tough call, but the tariff story could well keep DXY support at 106.15/35 intact - unless US equities tank."