The market initially brought the DXY Index lower by 1.1% to 107.75 on an unverified US newspaper report that the incoming Trump administration was mulling a narrower approach to tariffs, focused on selected critical sectors. The US Treasury 10Y yield declined by 24 bps to 4.573% from Friday’s 4.598% on the belief that Trump’s aides recognized the inflation risks associated with his universal tariff plan. However, the 10Y yield rebounded after Trump denied the report as fake news, ending the session 3.3 bps higher to 4.63%. DXY pared Monday’s losses to 0.7% at 108.24, its lowest close since December 30. The S&P 500 Index initially rose by 1.3% to 6021 before paring overnight gains to 0.6% at 5975.
Monday’s episode was reminiscent of the markets following Trump’s nomination of Scott Bessent as Treasury Secretary on November 22. Trump Trades had already lifted the DXY to 108, above the two-year range between 99.6 and 107.3. Believing that the well-respected hedge fund manager would be more market-friendly and pragmatic in steering Trump’s aggressive trade policies, speculators sold the DXY to 105.7 on November 29. However, Trump’s subsequent tariff threats on Canada, Mexico, China, the EU, and BRICS nations reinforced his willingness to pursue confrontational trade policies against both rivals and allies. DXY resumed its appreciation to a new high of 109.4 on January 2.
The two events emphasized a pattern. Markets would briefly respond positively to prospects of moderation in Trump’s unpredictable and polarizing policies. However, markets would also quickly adjust when Trump reinforced tariffs as central to his “America First” agenda of economic nationalism and domestic protectionism.
Canadian Prime Minister Justin Trudeau’s resignation announcement yesterday highlighted how Trump’s tariff threats could exacerbate internal political challenges. Trudeau’s approval ratings have plummeted from his inadequate response to Trump’s 25% tariff threat and Canadian exports to the US, adding to public discontent over economic management, namely, cost-of-living issues and deficit spending. Chrystia Freeland’s resignation as finance minister highlighted internal divisions within the ruling Liberal Party. Canada is headed for more political uncertainties. Parliament was prorogued until March 24, with Trudeau remaining prime minister until a new Liberal Party leader was elected. The opposition Conservative Party, which is eyeing the elections due in October, has capitalized on the tariff crisis to advocate a more confrontational stance towards the US. The political vacuum poses a challenge when Trump’s tariffs take effect at the start of his second term on January 20. Trump Trades lifted USD/CAD above its two-year range between 1.31 and 1.39 to 1.45. A sustained break above the 2016 high of 1.4580 could send towards the 1.50-1.60 highs of the early 2000s.
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January 7 in history
Brunei became the sixth ASEAN member in 1984.
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