USD: Sell America? - ING

Just when the dollar seemed to be regaining some confidence, the US decision to go ahead with a tariff hike of 104% on China led to a rotation away from the greenback. Interestingly, dollar deleveraging favoured European currencies yesterday, perhaps on the view that the measured EU response to US tariffs makes a trade deal more likely, ING's FX analyst Francesco Pesole notes.

Balance of risks is tilted to the downside today in DXY

"One of the reasons why the dollar is suffering the most from additional tariffs on China is that markets feel the lack of immediate substitutes for some Chinese products means even greater inflationary/recessionary risks for the US. At the same time, there is a diminishing negative effect on Chinese exporters from additional tariffs."

"While it's true that Trump is starting to negotiate with other key partners (like Korea yesterday), the technical times for trade deals aren't short, especially considering the large number of parts involved at the same time. We'll watch closely whether European equities outperform US ones again today."

"Should that happen in unison with a further widening in the 10-year Atlantic spread (which has moved from 154 to 175bp in the past 24 hours), it would signal the additional loss of confidence in USD-denominated assets that can add pressure on the greenback as markets lose confidence in its safe haven value. We think the balance of risks is tilted to the downside today in DXY, which can break below 102.0."