We maintain our outlook that the USD will reaffirm its haven status in the first half of this year. The factors contributing to the greenback’s decline in January-February appear temporary. They include US President Donald Trump’s delay of tariffs, US equities stalling with Fed cut expectations, and untenable optimism regarding Trump’s initiatives to conclude the war in Ukraine and secure a new trade deal with China.
Assuming no further delays, Trump’s extensive list of tariff commitments is set to take effect, beginning with 25% tariffs on Canada and Mexico goods next week. Trump’s reciprocal tariffs risks escalating trade tensions if the affected countries retaliate. US Treasury Secretary Scott Bessent has acknowledged that stalled US disinflation and the Fed’s ongoing balance sheet run-off could delay plans to extend the duration of government debt issuance. The Fed expects US PCE inflation (on February 27) to mirror the surprises in CPI and PPI inflation.
This morning’s EUR appreciation on the exit polls indicating the CDU/CSU securing the most votes (28.6%) in Sunday’s German federal elections should be short-lived. EUR/USD remains confined within last week’s 1.04-1.05 range. CDU leader Friedrich Merz, poised to become Chancellor, hopes to establish a government by Easter (April 20). Forming a stable and effective coalition government will be difficult because the CSU does not favour the Greens (12.3%). The Free Democratic Party (4.9%) paid dearly for bringing down the last coalition government led by the Social Democratic Party, which won the least votes (16.3%) since WW2. Exit polls show the far-right Alternative for Germany party (AfD) gaining almost twice as many votes (20.4%) from the last elections in 2021, alongside more votes for the Left Party (8.5%) and the BSW (4.9%). Forming a coalition in a fragmented Bundestag will likely result in policy compromises that dilute the effectiveness of economic reforms needed to address Germany’s sluggish economy and the political responses to Ukraine. Nonetheless, the new German government will likely maintain its firm commitment to Ukraine’s sovereignty and resist peace initiatives that exclude Ukraine and the EU or make concessions to the US and Russia. Ukraine’s bid for NATO membership, as part of a broader peace agreement, continues to face opposition from Russia.
Trump’s hope for a new comprehensive trade deal with China will necessitate substantial negotiations and reconciliations from both countries. An initial phone call between Bessent and Chinese Vice Premier He Lifeng underscored the complexities of US-China tensions. In a media interview, Bessent described the CNY as a difficult currency to value, citing capital controls and uncertainties around foreign investors’ ability to repatriate funds. While these comments did not explicitly call for a revaluation of the CNY, they implicitly encouraged foreign companies in China to reshore to the US, going beyond the Phase One Trade Deal that focused primarily on China increasing more US imports to address trade imbalances. Recent modifications of the US State Department’s online fact sheet on US-China relations have elicited strong protests from Beijing, intensifying scepticism regarding Washington’s sincerity in resolving trade tensions based on mutual respect, peaceful coexistence, and win-win cooperation.
Quote of the Day
“Reality is merely an illusion, albeit a very persistent one.”
Albert Einstein
February 24 in history
In 2020, scientists identified the first animal that did not need oxygen to breathe – a tiny parasite living in salmon tissue, reported in journal PNAS.
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