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The USD has fallen against all G10 currencies this week, as Trump made a U-turn to exempt Canada and Mexico goods covered by the USMCA trade agreement from his 25% tariffs until 2 April. This tariff outcome is not as bad as feared, and once again reflects Trump’s inconsistency over his messaging and application of tariffs. The DXY index is now back at 104 and has given back all its gains following Trump’s election win.
EUR/USD also surged above 1.07, helped first by rising Bund yields and then ECB signalling less certainty on rate cuts, stating that monetary policy is becoming meaningfully less restrictive. EU leaders holding emergency talks in Brussels have also agreed on a massive increase to defence spending, which should support EUR optimism. EC President von der Leyen presented a EUR800bn ReArm Europe plan, funded by activating an escape clause for the Stability and Growth pact and new loans for defence investment. Germany’s Chancellor-in-waiting Merz has already proposed exempting defence spending of more than 1% of GDP from the constitutional debt limit earlier this week. S&P Global says that Germany’s defence spending plans are a credit-positive, and that its AAA rating is safe.
USD/CNH has eased below 7.25 even after US tariffs on Chinese goods were raised this week, and China retaliating with 10%-15% additional tariffs on US agricultural products. At China’s press conference for the Two Sessions yesterday, PBOC Governor Pan emphasized the need to keep the RMB stable, and that China’s FX market is resilient. He also said that PBOC will cut interest rates and the RRR at an appropriate time. Governor Pan also said that a tech-focussed board in onshore bond markets will be launched, and that more bond issuances and relending tools will be used to help China’s tech development.
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