Monday saw a pick-up in FX volatility on the back of a Washington Post report – quickly rejected by Trump – that incoming US tariff policy could be more selective than first feared. The US Dollar’s (USD) failure to recover all its intra-day losses on Monday likely indicates two factors: first, the market had been heavily favouring the dollar following a nearly continuous three-month rally; second, a view that there is no smoke without fire and that the contents of that Washington Post report sounded sensible, ING’s FX analyst Chris Turner notes.

Incoming US tariff policy can be more selective

“It is unlikely investors will want to consider actively selling the dollar ahead of Trump’s inauguration on 20 January on speculation over softer tariffs – but we could see a little more rebalancing of FX positioning and a little more dollar consolidation in the interim.”

“A second point worth mentioning is that risk assets are slightly better bid on the prospects of less aggressive US tariff policy plus the news yesterday that the Fed’s Michael Barr is stepping down in his role as the Fed’s financial supervision tsar. He had been battling Wall Street for tighter capital controls, but it seems he did not want a looming fight with the new administration to distract from the Fed’s work. The US KBW regional banks index briefly rallied 2% on the news.”

“Turning to today, the focus will be on US JOLTS job opening data and the ISM Services index for December. Both could actually be supportive of the dollar, but let’s see whether investors will want to use dollar rallies to pare back long dollar positions – such that any DXY rallies stall in the 108.40/60 area.”