The US Dollar: A Haven Amidst Trade Tensions

The US dollar continues to demonstrate its status as a favored asset in the face of tariff threats. Following President Donald Trump's statement favoring levies "much bigger" than previously suggested, the dollar surged.

The Bloomberg Dollar Spot Index experienced its largest intraday increase in a week, rising by 0.5%. This surge was also driven by market volatility surrounding DeepSeek, a Chinese AI startup, which has raised concerns about US dominance in the technology sector.

"The dollar remains strong until proven otherwise," stated Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. "While it has room for decline, the threat of tariffs will remain a bargaining chip."

Trump's remarks have fueled demand for the dollar, with investors positioning themselves for higher prices and interest rates under his policies. Tariffs would also limit dollar flow abroad, further bolstering the currency.

The euro and yen depreciated significantly against the dollar, along with the risk-sensitive Australian dollar.

US Treasuries regained some ground after losses on the previous day, with the 10-year yield remaining stable at 4.54%. Trump has also hinted at potential tariffs on vehicles from Canada and Mexico.

"Markets have been optimistic about tariffs given the lack of action," said Aroop Chatterjee, a strategist at Wells Fargo. "However, as tariff reality approaches, we expect the dollar to benefit."

Despite a sell-off sparked by DeepSeek's progress, the dollar rallied as traders questioned the sustainability of the selling pressure. Leah Traub of Lord Abbett & Co. emphasized the persistent "buy the dip" mentality in US equities and credit.

However, recent data suggests some doubt about the dollar's continued ascent. Derivatives traders have reduced bullish bets, indicating potential volatility. Nevertheless, shorting the dollar has proven costly in recent months, with a 7% gain in the last quarter of 2024 and a 4% rise since Trump's election.

"Investors may have overestimated the dollar's dominance under Trump," said Shoki Omori of Mizuho Securities. "This could lead to significant volatility as positions heavily favor a stronger dollar."