Thoughts from Asia & Europe on what has been contributing to a weaker USD
The desk posits that a combination of geopolitical tensions and economic policy responses in Asia and Europe is contributing to a weaker USD. Per the full note from MUFG EMEA, analysts Lee Hardman and Michael Wan highlight the impact of Trump's tariff policies and the potential for political shifts in Europe, particularly with the upcoming German elections. The desk notes that these factors have led to a shift in market sentiment, with traders increasingly favoring currencies that may benefit from a more stable geopolitical landscape. This sentiment is reflected in the broader market dynamics, where the USD has faced downward pressure against major currencies.
What the desk is arguing
The current weaknesses in the USD can be attributed to both geopolitical tensions and evolving monetary policies stemming from the recent tariff discourse initiated by Trump. As policymakers in Asia and Europe respond to these tariffs, the sentiment reflects growing confidence that may undermine the dollar's strength.
Additionally, developments related to the German elections and the potential for resolutions regarding Ukraine may further contribute to a depreciation of the USD. These factors not only highlight the immediate economic implications but also suggest an underlying shift in market sentiment towards currencies that are perceived as more stable amid geopolitical uncertainty.
Where it sits in our coverage
Our current consensus target for the USD stands at 1.075, with a firm range from 1.04 to 1.12. This stance aligns with our prevailing outlook, as we recognize the weakened state of the dollar in light of the discussed geopolitical risks and economic forecasts.
Specific targets from peer firms indicate a similar trend: - Barclays: 1.10 (Mar-26) - JPMorgan: 1.10 (Mar-26) - Goldman Sachs: 1.08 (Mar-26)
How other firms see it
Analysts from bankofamerica are taking a contrary view, setting a lower target of 1.04 for the dollar in March 2026, indicating more pessimism regarding the USD's resilience against external pressures. This diverging perspective highlights differing interpretations of potential market recoveries and shifts in global economic patterns.
- Bank of America: 1.04 (Mar-26)
- Morgan Stanley: 1.06 (Mar-26)
- Deutsche Bank: 1.09 (Mar-26)
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical factors and monetary policy responses are key drivers of USD weakness.
- 02Analysts express concerns regarding future economic stability amid tariff policies.
- 03Peer institutions display varied targets, reflecting differing market outlooks.
Market implications
The ongoing geopolitical developments and potential policy shifts may lead to increased volatility in the FX markets. Investors should consider positioning in currencies likely to benefit from a weaker USD in this evolving landscape.
Risks to this view
Risks include sudden reversals in geopolitical sentiment or unexpected economic data releases which could stabilize or bolster the USD unexpectedly. Additionally, any abrupt changes in central bank policies could significantly impact currency valuations.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 14th February 2025 and joining Lee to post some questions on the financial market themes for the week ahead is Michael Wang, Senior Currency Analyst in Singapore. 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 everyone, thanks for joining today's podcast. Today we've got Michael Wang, Senior Currency Analyst on the podcast over from Singapore.
Thanks for joining today Michael. Hi, thanks for having me Lee. We've seen in the FX market at the start of this year that the dollar has been very volatile and I think going into this year most people are expecting the dollar to strengthen further but that hasn't really been the case over the last couple of weeks.
What are your thoughts on that Michael? Yeah, so certainly there's been some reversal as you mentioned in dollar strength at the start of the year. I think from Asian currency's perspective certainly one big element to that has been the sort of delay in terms of tariff implementation and over there there's sort of various policies that have been put out since Trump came in over the past three weeks but perhaps some of which have been not met market's expectations in terms of both the severity and also the swiftness of the implementation.
And I think for Asian currencies in particular you saw the past week in terms of what's been talked about the reciprocal tariffs. So, in particular, President Trump has directed the US Commerce Secretary to propose new levies on a country by country basis in an effort to help reduce the trade deficit. It's still uncertain in terms of the details that will be out but I think it's really interesting that this import taxes seems to be customised not just to focus on trade but also target a whole range of non-trade related issues such as unfair subsidies, regulations, value-added taxes and so on.
So, for what it's worth our first-cut analysis for Asian currencies suggests that India looks most vulnerable in Asia just from full reciprocity in tariffs followed by Indonesia, Vietnam and Thailand and for instance US tariffs on India could rise to above 15% in theory from 3% currently if full reciprocity were enforced in theory. But nonetheless there's a whole range of other stuff that President Trump has talked about this week including value-added taxes, non-tariff barriers and even then a country such as India does come up a little bit quite high in terms of some of the non-tariff barriers that it places. So, bottom line it seems like markets have taken some of these measures in the sense that there's a lot of swift announcement but in terms of the implementation it's a little bit more delayed perhaps relative to what markets were expecting and so you've certainly seen some correction in terms of Asian currency weakness over the past one to two weeks certainly.
So, that's for Asia. Perhaps I can turn to you Lee and we'd love to get your thoughts in terms of how Europe has reacted to Trump's tariffs and certainly Trump has talked quite a bit about Europe in this regard. So, what do you get your thoughts about how you see Europe's impact and the euro dollar in particular as well?
Yeah, good question Michael. Yeah, certainly looking at how the euro's performed in recent weeks you can see it's has staged a bit of a relief rally with euro dollar climbing back above the 105 level today. So, that does kind of highlight that at least initially market participants are kind of relieved that so far kind of Europe and the global economy has kind of avoided a kind of a worst case scenario in terms of Trump's tariff so far.
Admittedly though it's still early days and like you say he has clearly indicated that he is likely to target the EU with more significant tariffs fairly quickly. So, it's not that I think Europe has escaped from Trump's tariff threat. It's just for now it hasn't been hit maybe as quickly as maybe the market was fearing.
Like last week, this week we obviously heard that he's going to implement tariff hikes of 25% on steel and aluminium which obviously Europe and the EU is likely to be impacted by. I think what really what the markets kind of will be watching closely is more the reciprocal tariff hikes at this stage. Like you said, he has voiced concern in the past over the high BAT rates that the EU countries impose on imports from the US.
So, if that is incorporated into the calculations in terms of what tariffs they put in place from April going forward on the EU, that could increase the risk of more significant tariff hikes for Europe. So, we're still wary that at some point as we go into the second quarter that the euro could face downside risks from these tariff hikes being implemented on Europe. And even if those reciprocal tariff hikes don't bring the euro lower, Trump has also talked up the possibility of putting in place specific tariff hikes on sectors such as the pharmaceutical sector and the auto sector which would also be damaging potentially for Europe's economy in the euro.
So, I was thinking as well from your perspective, you were mentioning about the tariff hikes that we saw put in place on China, the 10% tariff hikes there. How would you kind of describe the response that we've seen from the policymakers over in China? Yeah, good question.
So, I think the overall message in terms of the response at least so far seems to be quite a measured response in our view. And in particular, China has so far done tariffs on products such as oil, LNG, coal and agricultural equipment, coupled with some export restrictions on key metals such as tungsten, together with export controls and putting some US companies onto the entity blacklist and alleged antitrust violations for some US companies. So, overall, just for context, for instance, China's imports from the US in terms of these products which have been targeted are reasonably small.
So, LNG, for instance, forms about 6% of its total imports, oil roughly 3% of its total imports from the US. So, the overall message seems to be that these countermeasures so far have been quite measured and potentially opens up space for negotiations. Although, certainly, we haven't seen any specifics regards to the 10% that was announced by Trump on China already.
I think, more broadly speaking, if you look at China in terms of its response to Trump's tariffs, it's not just the retaliatory and negative measures, but more broadly, I think China's response is also on the positive side. So, in particular, you're also seeing some more positive sentiment in equity markets, in part driven by the AI-related boom helped by DeepSeek and some of the AI and tech-related names. But in particular, if you look at policy perspective, there's a news out this week on Friday that President Xi is planning a meeting next week with some of the key tech entrepreneurs.
And historically, this has been potentially a prelude to a more friendly environment for the private sector moving forward. So, this certainly is something to watch out for in China, both in terms of how China creates space for negotiation with Trump moving forward, and also some of the measures it continues to take to boost sentiment, both in terms of private sector confidence and also in terms of the stimulus measures that could come up in the March NPC meeting. So, those will be the key sort of market focus.
Yeah, so that's on China. And on my end, perhaps I would love to get your thoughts as well. You know, the upcoming German elections coming up next week, and certainly that's a potential local factor that could affect the euro and perhaps the dollar more broadly.
So, yeah, I wanted to get your thoughts about how that could have any market impact and the various scenarios for German elections. Yeah, no, kind of looking at the latest opinion polls from Germany ahead of the election, it's still pointing towards the CDU, CSU parties becoming the biggest winner in the election. Obviously, they'd have to form a coalition again with other parties, I think in an ideal scenario, they would like to have a smaller coalition, potentially only with the SPD party.
And I think the markets are generally viewing a change in government in Germany, a shift more towards the right has been potentially more supportive for growth in Germany going forward. Obviously, Germany's economy has been stagnating now for a number of years since the Ukraine conflict started, given the headwinds to growth, particularly for the industrial sector from elevated energy costs in Germany. And there is a hope at least that under the new government after the election, the CDU, CSU parties have certainly indicated that they do plan to put in place more business friendly policies, looking at potentially cutting corporate and income taxes.
And I think the market as well is going to be watching closely after the election, whether the government, the new government is able to or willing to also look at loosening the debt break in Germany to potentially allow more spending from the government, which as well could be more supportive for growth going forward in Germany. And then it's a final potential kind of key decision as well from any new German government would be what would happen after, say, a potential ceasefire agreement in the Ukraine. Would the new German government be willing to negotiate with Russia to accept more gas flows returning to Germany and Europe?
Or would they be reluctant to go down that route, given that they've weaned themselves off the supply of cheap energy from Russia over the last couple of years? So that's a kind of key question as well, which could be very important in terms of the German growth outlook going forward. For the euro, like I'd say, the overall probably take would be that near term, probably don't see this as a kind of significant catalyst for euro gains.
But over a longer period of maybe one or two years, if growth in Germany does improve under the new government, that would be a more supportive factor for the euro. We also have to consider as well there are obviously potential risk scenarios where maybe the euro could weaken after the election if there's sort of disappointment. If, say, the vote is spread more evenly amongst different parties in Germany, and it makes it more difficult for the CDU, CSU to form a working coalition government, the market might then start to have some doubts over the ability of them to implement kind of economic reforms that the market's kind of hoping are going to be put in place to try and support growth.
So it's not all potential upside for the euro, but generally speaking, the risk probably is a bit more tilted to the upside for the euro from the upcoming election. And then finally, one final question for you, Michael. You mentioned the performance of the Indian rupee and the risks to India, specifically from Trump's tariffs.
But are there any other kind of local factors as well to watch out for? Yeah, so on the Indian rupee, it's really interesting because it's one example where we've been telling clients, and certainly during the recent roadshow in Europe as well, that local factors really matter as well. And we've been cautious on the Indian rupee certainly since the start of the year.
And we've been forecasting dollar INR at 88.5 by year end, so implying some underperformance against Asian currencies through the year. Over the past week, you've seen some interesting moves by the central bank to sell dollars very aggressively. Some market participants estimate more than 12 billion dollars in terms of dollar sales.
So in a sense, on our end, we believe that this indicates some short-term discomfort by the central bank around the pace of weakness. But on our end, we don't believe this changes the long-term fundamentals guiding our views, thinking that the Indian rupee could underperform this year. And there's a couple of reasons, a whole host of reasons as to why we think so.
Number one, a wider current account deficit. Number two, a cyclical slowdown impacting portfolio inflows, including into the equity market. And number three, foreign direct investment into India is the weakest it's been in more than 10 years, driven by rising repatriation and last but not least, is this keyword called trade-off.
So in a sense, we think that RBI's very aggressive FX intervention strategy has had an unintended trade-off in the sense that it's tightened system liquidity, leading to higher money market rates. And so that has also resulted in some drawback in terms of some negative spillovers into growth as well. So the bottom line for us is that we think through 2025, the Reserve Bank of India will resolve this trade-off by continuing to pivot towards growth.
And we forecasted a 25 basis points rate cut by the RBI last week. And that happened. And we think moving forward that the RBI will continue to cut rates.
And with that, the Indian rupee, apart from global factors, which we discussed earlier, will have to find a little bit weaker level. And hence, we think that the bias is still for some higher dollar INR rates as we move to 2025. And perhaps on my end, I could end off with this question for you, Lee, on the global front and on Europe.
What do you think about the Ukraine ceasefire and its potential impact on European currencies, given that it's been talked about quite a bit by Trump and potentially has some market impact on the dollar and on Europe as well? Yeah, it certainly has gained more market focus in recent days after we had the first phone call between Presidents Trump and Putin. And they've reportedly started work to try to reach some form of a ceasefire agreement.
So, yeah, certainly the possibility of some form of ceasefire materializing in the next couple of months, that is become more likely. And we've seen European currencies and asset markets have been strengthening to reflect that optimism over a reduction in the geopolitical risk premium in the region. In particular, if we look at Central European currencies and their local equity markets, those have clearly outperformed at the start of this year.
And I think part of that is the optimism there over a ceasefire agreement between Ukraine and Russia. The one thing, though, that we've kind of been emphasizing in terms of the impact on European currencies in the euro and whether there's potential there for the euro to strengthen further from here. I think the key point ultimately will be whether some form of ceasefire deal, does that have a material impact on energy prices in Europe?
I mean, that has been the kind of lasting negative impact, really, of the conflict is that it has meant that energy prices in Europe have been at more elevated levels. And that's been a major headwind to growth in Europe in recent years and contributed to the weakness in the euro against the dollar. So for that to change, something has to happen in terms of the relationship, in terms of energy flow between Russia and Europe.
And I think that's the key kind of unknown. We'd be kind of naturally skeptical on that, thinking that major European countries like Germany and Italy would be kind of reluctant to go back to Russia and see gas returning quickly to Europe. Obviously, it would be good for their economies and that it would help to bring down energy gas prices more quickly in Europe, which would certainly provide a positive shock to the growth outlook in Europe.
So that's certainly one potential kind of catalyst which could see the euro strengthen more later this year and into next year if Russian gas was to come back on stream in significant flow and more quickly. But like I said, we're somewhat skeptical that they'd be willing to allow that or to go down that route, given they obviously have gone through a painful process to try and reduce their dependency on energy from Russia. And I'm not sure they'd want to quickly return to that so soon.
So that potentially could limit the further upside for the euro and European currencies if energy prices don't come down as quickly maybe as in that kind of more positive scenario. So yeah, that's kind of our take on proceedings at the moment. But it's certainly one to watch closely in the coming months as it does have the potential to have a bigger impact on the euro and euro currency performance.
And with that, we'll wrap up today's podcast. Michael, thank you very much for joining and everyone else. Thanks for listening today.
Sources & References
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