US Dollar: Trade tariffs to reshape FX volatility – MUFG

Derek Halpenny at MUFG explains that US trade tariff uncertainty is set to re-emerge as Section 122 measures expire and are replaced by more targeted Section 301 actions. He expects widespread investigations and tariffs that broadly replicate current measures, with USD/Asia seen most vulnerable to upside. G10 FX should be less affected, though prolonged uncertainty could eventually trigger US Dollar selling.

Section 301 actions and Dollar impact

"The US will use Section 301 and investigations have already been announced against most of the key trading partners of the US although when implemented and against what products remains unclear."

"The fact that these tariffs should broadly replicate the Section 122 tariffs, means the FX implications should be limited."

"However, the path to implementation is less predictable with greater potential differentiations that could see increased FX volatility."

"The fact this latest bout of trade policy uncertainty comes at a time when the rates curve in the US is priced for hikes and Middle East risks are higher could mean the FX reaction function is different and is more US dollar supportive."

"USD/Asia would perhaps be where you could see most upside where yield would be less of a counter to say the impact on USD/LatAm."

"G10 FX should be less impacted and if the uncertainty becomes more prolonged and pronounced, we could see US dollar selling re-emerge as investors grow more concerned over unpredictable policies from Washington and the damage to the US economy."