“One day you have tariffs, the other you don’t,” said Zain Vawda, an analyst at forex consultancy Oanda. “These constant policy changes are hurting the dollar.”
Unprecedented volatility has encouraged traders to move away from the U.S. and buy the euro, the British pound and Swiss franc, he said.
And as Washington eyes two to three rate cuts this year, the de-dollarization trend is expected to stick around for some time, potentially boosting top G10 pairs such as the EUR/USD, CHF/USD and CAD/USD, Vawda said.
The euro, the most heavily traded currency against the dollar, could see gains amid a strengthening European economy, a large stimulus package and expectations that interest rate cuts will be more moderate than in the U.S.
On July 27, the U.S. and the EU signed a long-awaited trade deal that will see the EU pay a 15% tariff to sell its goods to the U.S., down from the much higher 30% that was initially proposed. The announcement saw the dollar gain about 1.2% on the day, though it’s still down roughly 13% this year.
Mark Connors of financial consultancy Riskdynamics doesn’t expect the deal, alongside a Japan trade accord struck on July 23, to significantly boost the dollar until more acute risks are addressed.
“These agreements remove tariff uncertainty,” said Connors. “But we still have a massive budget deficit and debt crisis.”
Amid ongoing uncertainty, the dollar’s performance could become a headwind or tailwind for other top currencies:
British pound: While the pound nearly hit 1.4 against the dollar in late June, the weak greenback fueled most of the gains, not investor faith in the UK’s economy, analysts said. Vawda sees GBP trading relatively flat for the next year.
Canadian dollar: Hovering around 1.38 per U.S. dollar as of mid-September, Canada’s currency could gain if Ottawa and Washington reach a favorable tariff deal, beyond overhauling the U.S.-Mexico-Canada Agreement next summer, Vawda said. This is because oil prices would likely gain, boosting Canada’s key export and potentially its currency as a result.
Swiss franc: While it could continue to benefit from its safe-haven status, a significant rise means the central bank could sell CHF to lift exports.
Japanese yen: The Japan trade deal included a 15% levy on the nation’s U.S. shipments and a $550 billion Japanese investment commitment. While this removed tariff uncertainty, Connors doesn’t expect the sluggish yen to tick up until the Asian country tackles a string of macroeconomic challenges.
“Japan still faces fiscal challenges, high inflation with low growth and a wide trade differential with the U.S.,” said Connors. Its overnight lending rates stand at 50 basis points (bp) compared over 400bp for the U.S. “Unless they bring up rates soon, at least 25bp, I don’t see the yen moving significantly higher.”