Unstable Dollar Due to Tariffs

The U.S. dollar showed brief signs of recovery on Tuesday after a sharp decline the previous week, during which the dollar index dropped over 3%. While it gained modestly against the euro and yen, the greenback remains under pressure as investors stay wary of ongoing trade tensions and the unpredictability of U.S. economic policy under President Donald Trump. These concerns have prompted a global reassessment of U.S. assets, triggering capital flows toward perceived safer or more stable markets.

Rapid policy shifts and mounting tariff threats have undermined investor confidence, with market participants now driven more by broader asset reallocation than by traditional factors like interest rate differentials. Vassili Serebriakov, strategist at UBS, noted this reflects a growing skepticism about U.S. economic dominance. Slowing growth, tariff-related uncertainty, and improving sentiment in Europe have all contributed to the dollar’s weakening position.

On Tuesday, data showed an unexpected drop in U.S. import prices in March, largely due to falling energy costs. This suggests inflation was already cooling before Trump’s tariff measures were implemented. Although trading was calmer in this holiday-shortened week, cautious sentiment persists as markets await further clarity on trade policies. Prashant Newnaha from TD Securities described last week’s market tone as driven by deleveraging and a shift away from U.S. assets.

The euro, while down 0.7% on the day to $1.127, remains relatively strong after hitting a three-year high of $1.1473 last week. ING analysts noted that the euro’s strength reflects its role as a preferred vehicle for expressing diminishing faith in the dollar. Meanwhile, Eurozone investor confidence suffered its steepest decline since Russia’s invasion of Ukraine, with ECB data showing tighter credit conditions as banks brace for a weaker outlook. The ECB is widely expected to cut interest rates by 25 basis points this week.

In Asia, the dollar edged slightly higher against the yen to 143.16, recovering from a six-month low. Japan's economy minister is scheduled to meet with U.S. officials to push for the removal of Trump-era tariffs. The dollar also rebounded 0.91% against the Swiss franc, although it remains near a 10-year low. Analysts say the franc’s strength is due to its traditional safe-haven status and speculation that the Swiss National Bank may avoid direct intervention despite currency pressures.

However, the dollar’s rebound was short-lived. By Wednesday, it was once again losing ground, particularly to the franc and the euro, as markets reacted to further U.S. trade policy moves—including restrictions on chip exports to China and a probe into critical mineral imports. The Canadian dollar also continued to climb, up 4% in April, as global investors punish the dollar over erratic policymaking and looming recession risks.

With key events still ahead—such as U.S. retail sales data, Federal Reserve Chair Jerome Powell’s remarks, and a Bank of Canada decision—markets remain cautious. Despite intermittent gains, the dollar continues to struggle under the weight of policy uncertainty and shifting global investor sentiment. Unless clarity emerges from Washington, the greenback may face continued volatility in the weeks ahead.