USD: Not an April re-run, but risks are mounting - ING

After the weekend de-escalation in tariff risk, market concerns have risen again overnight. China placed limits on five US entities of Hanwha Ocean, a Korean shipbuilding company, in response to the US investigation into China's trade practices. The tone from Beijing remains firm, with the Ministry of Commerce vowing to 'fight to the end' in the trade war. Meanwhile, Secretary Scott Bessent - who struck a conciliatory tone after Friday's escalation - claimed China wants to 'pull everybody else down' in this FT interview, ING's FX analyst Francesco Pesole notes.

USD may face further downward pressure

"The FX market is reacting to the re-escalation with safe haven demand benefitting JPY, CHF and EUR more than the dollar, while the highly China-sensitive AUD and NZD are taking a beating. Our baseline view is still that an extension of the tariff truce on 1 November is more likely than a return to a fully-fledged trade war. The risks remain rather elevated, though. China's trade numbers released on Monday showed Beijing can afford to stretch its muscles on trade with the US thanks to strong export diversification."

In a scenario of further escalation, the USD may face downward pressure. However, its renewed status as a safe haven and expectations that the US administration might retreat could shift concern toward Treasuries. Should markets find reasons to ease their nerves about the Japanese political situation, the undervalued JPY is in a prime spot to benefit from further escalation. US markets resume full trading schedules today after a long weekend, but the US shutdown remains far from being resolved. The few data releases we get should have a magnified impact, so it's worth closely monitoring the NFIB Small Business surveys today."

"On the Fed side, Chair Powell will discuss the economic outlook and monetary policy today, but with no fresh jobs data, he may simply stick to his recent cautious narrative. The impact amid data silence can still be felt in markets and the dollar probably faces some upside risks. The speaker's agenda today also includes doves Bowman and Waller, and 2025 voter Collins. We aren't supporters of an extended USD comeback. Once data resumes, we expect evidence of worsening employment to take the dollar back to early October levels, and then down to fresh lows by year-end."