USD: US-China de-escalation in sight? - ING

The US Dollar (USD) rebounded alongside US equities yesterday as market fears about tariffs eased partially, ING's FX analyst Francesco Pesole notes.

USD finds footing after oversold stretch

"We also suspect some positioning rebalancing is behind the dollar recovery. As we warned in yesterday's FX Daily, the dollar was facing a new degree of downside risks stemming from Trump's attack on the Fed's independence, but the greenback's position was undeniably oversold and undervalued, meaning that a return to better FX liquidity on Tuesday could have favoured some stabilisation."

"Treasury Secretary Scott Bessent threw a lifeline to fragile US sentiment with conciliatory remarks on the US-China trade war. Bessent said the current tariff situation is "unsustainable" and expects a de-escalation in the near term. We could witness a period where the dollar is tossed around by headlines of Fed independence risk and market-friendly news on US tariff policy. What is clear by now is that no other G10 currency has a higher positive beta to trade news than the dollar."

"Net-net, we still think the balance of risks remains skewed to the downside for USD in the near term, but we don't expect a repetition of the one-way traffic in dollar selling we have witnessed of late. Looking a few weeks ahead, our preference is for a stabilisation in the dollar rather than another structural weakening."