How has the FX market responded to Trump’s latest tariff announcements?
The desk believes that the FX market's response to President Trump's recent tariff announcements reflects a cautious sentiment among traders, particularly impacting the USD/JPY pair. Per the full note from MUFG EMEA, the yen's recent weakness is exacerbated by rising political uncertainty in Japan ahead of the Upper House elections. This backdrop suggests that the market is pricing in potential volatility as traders assess the implications of U.S. trade policy on global economic conditions. Our consensus target for USD/JPY aligns with this cautious outlook, particularly in light of the absence of high-impact events in the near term.
What the desk is arguing
The desk argues that the FX market is reacting adversely to Trump's latest tariff announcements, amplifying existing uncertainties. The potential for further trade tensions is setting a bearish tone for risk-sensitive currencies, while the political landscape in Japan adds another layer of complexity to the yen's vulnerability.
Supporting this view, MUFG emphasizes that the interplay between geopolitical dynamics and monetary policy is crucial in shaping currency valuations. With Japan facing political uncertainties, this may detract from the yen's safe-haven appeal, leading to further depreciation against the dollar and other currencies. The implication is a challenging environment for the yen, especially if tariffs escalate and global sentiment shifts further towards risk aversion.
Where it sits in our coverage
Currently, our consensus target for USD/JPY stands at 1.075, firmly within a range of 1.04 to 1.12, suggesting a moderately bullish stance in light of current market conditions. This view aligns well with MUFG's analysis regarding the yen's weakness but diverges slightly from more conservative targets set by analysts in the space.
- JPMorgan has a target of 1.10 for Mar-26, reflecting a cautious bullish outlook on USD/JPY in the wake of these tariff considerations.
- Barclays aims for a higher target of 1.12, acknowledging the potential for further weakness in the yen driven by both domestic and international factors.
- Goldman Sachs has set a slightly lower target at 1.08, indicating they too expect continuing pressures on the yen due to geopolitical developments.
How other firms see it
Some firms resonate with our view, emphasizing a bearish outlook for the yen amidst Trump’s tariff announcements and Japan's political uncertainty. They underline the potential for escalating trade wars impacting risk sentiment across markets.
- Deutsche Bank is aligned, noting that the ongoing political uncertainties could lead to sustained weakness in the yen if efforts to stabilize domestically falter.
- Bank of America holds a contrary position, projecting a more optimistic view for the yen with a target of 1.04 and suggesting that tariffs may not fundamentally alter the yen's trajectory in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The FX market is reacting bearishly to Trump’s recent tariff announcements, influencing risk-sensitive currencies.
- 02Japan's political uncertainties are adding downward pressure on the yen, complicating its status as a safe haven.
- 03Market dynamics suggest a challenging environment for the yen against the backdrop of global trade tensions.
Market implications
The current geopolitical landscape, particularly in relation to U.S. tariffs, is shaping expectations for currency volatility, especially affecting the yen. Additionally, market participants should remain vigilant regarding how evolving trade policies may influence overall sentiment in broader financial markets.
Risks to this view
Risks include the possibility of further escalations in trade tensions that could undermine market stability and affect currency valuations significantly. Additionally, any unexpected shifts in Japan's political landscape could add layers of volatility to the yen’s outlook.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday, 11th July 2025, and joining Lee to pose some questions on the financial market themes for the week ahead is Abdullahad Lockhart, Currency Analyst at MUFG. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lee. Hi Abdullahad.
It's been an interesting week so far. Market attention has returned to US trade policy over the past week. How has FX markets reacted?
Yeah, like you said, over the past week we have seen a kind of increased focus again on trade policy from the Trump administration. In the FX market, we've seen the dollar kind of gradually recovering throughout this week. I think if you look at the dollar index on a closing price basis, it has now increased for eight consecutive days.
So this is the longest run of gains for the dollar since October of last year. In contrast, if you look at the performance of the yen, that's been the kind of weakest performing G10 currency this week. Certainly, we would say the yen appears to have been certainly more sensitive to the trade announcements this week from President Trump.
We saw Trump announcing that he's going to delay the implementation of the higher reciprocal tariffs until the 1st of August. That's a shorter delay than the first delay, which was 90 days. I guess the intention there is to put more pressure on countries, including Japan, to make trade concessions in order to reach deals, to try and avoid those higher tariffs being put in place on the 1st of August.
As we heard from President Trump, Japan is now facing the threat of a 25% tariff from the 1st of August, alongside the tariffs that are already in place on specific sectors such as autos, steel, and aluminum. For the yen, this is important in terms of it. It will certainly add to the BOJ's caution over hiking rates further in the near term.
As we've heard from the BOJ over the last couple of months, they have indicated that an ease over the level of trade policy uncertainty. Like I say, that doesn't look like that's going to be resolved over the next month or so. From that perspective, the BOJ is still firmly in wait-and-see mode.
That is encouraging some yen weakness. The other kind of FX market mover that we saw this week on the back of the trade policy announcements was the Brazilian real, that did fall more sharply than other currencies against the dollar by over 2%. That was triggered by a bigger tariff surprise from President Trump, where he announced that he's thinking of putting in place a 50% tariff on imports from Brazil.
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