by Ruth Carson
Wall Street banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. think there is still plenty of money to be made buying the dollar, even after US President Donald Trump’s tariff-push sent the greenback soaring.
Among their trades: Goldman Sachs expects the dollar to break parity against the euro. JPMorgan predicts the US currency to buy around 1.50 Canadian dollars for the first time in a generation.
Almost every asset class sold off after Trump said he will slap tariffs against Canada, China and Mexico from Tuesday, leaving the dollar the unanimous winner. Although many traders had been braced for tariffs before Trump’s inauguration, his initially soft tone on China fueled bets that he might hold fire, undermining the dollar rally. Those hopes have proved short lived.
“Tariffs have a strong, direct and unambiguous impact on exchange rates, unlike other asset classes,” Goldman Sachs strategists including Dominic Wilson wrote in a note, noting risks of an 8% to 10% fall in the euro in a global tariff scenario.
Underpinning the dollar’s appeal is the assumption that a trade war will support US inflation and thus interest rates as well as hurting foreign economies more than the US and enhancing its appeal as a haven at a time of risk.
The dollar’s march higher on Monday pushed the loonie to its weakest level in more than two decades, while the Mexican peso, the euro and the Australian dollar fell to multi-year lows.
Going long dollars has become one of the most popular trades in global markets recently. Leveraged funds are more bullish on the currency than they have been since Sept. 2018, according to Commodity Futures Trading Commission data compiled by Bloomberg.
JPMorgan recommends being positive towards the greenback and yen positions against currencies of economies targeted by tariffs, such as the Canadian dollar and euro. It said the immediate introduction of 25% tariffs could weaken the loonie as far as 1.58 per dollar, while the dollar could hit 23.50 against the Mexican peso and 7.37 against the offshore yuan.
Although the eurozone was spared from Trump’s weekend tariff announcements, he has said tariffs against the trading bloc “will definitely happen.”
Goldman Sachs sees the dollar strengthening against peers like the Chinese yuan as its status as a safe-haven currency burnishes its appeal. It reckons the onshore yuan could weaken as far as 7.50 per dollar.
Wells Fargo & Co also likes the dollar and the yen based on safe haven appeal, and is positioning for a weaker Mexican peso and yuan, said Brendan McKenna, an economist at the bank. He said markets may still be “seriously underpricing” the likelihood of tariffs.
Citigroup Inc. strategists are more cautious. They see a stronger US currency in the short-term, but said this could be reversed as markets digest the impact of tariffs on the world’s largest economy.
The dollar’s ciimb is fueling questions about just how far the rally could go, with 2022 peaks the next potential pitstop. But there are complicating factors for traders.
Tariff spats are usually assumed by economists to be lose-lose propositions for the countries involved, increasing the risk of volatility. There is also a chance that Trump reverses course, after a history of unpredictability during his first term.
“Given some signs that traders still see the potential that President Trump’s tariffs will prove to be short-lived negotiating tactics, the US currency has plenty of room to climb significantly further the longer the trade confrontations extend.”
Garfield Reynolds, Markets Live strategist
“When the economic consequences hit the US, for example, then you start to see things could reverse,” said Ken Peng, head of investment strategy for Asia at Citigroup wealth division in Hong Kong. “I’d rather be a volatility buyer at the moment, rather than a directional bet.”
Canada has already fired back with its own 25% tariffs on the US after Trump’s initial shot, while Mexico and China have vowed to retaliate. The European Union, meanwhile, has promised to “respond firmly” if the US imposes tariffs.
Copyright Bloomberg News
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