UBS On-Air: Paul Donovan Daily Audio 'Protectionist, or pushover?'
Per the full note source, UBS Chief Economist Paul Donovan argues that President Trump's reciprocal tariff announcement is a net negative for the USD due to the delay in implementation, which markets interpret as a sign of weakness. The desk contends that the threat to target value-added taxes (VAT) is non-credible, as no trading partner will abandon such a revenue source. Consensus among FX strategists leans toward further USD depreciation, with the next catalyst being US retail sales data today. The view hinges on whether Trump's social media posts inject sudden volatility, but for now the bias is bearish USD.
What the desk is arguing
Per the full note source, UBS Chief Economist Paul Donovan frames Trump's reciprocal tariff announcement as a net negative for the USD. The key point is the delay: Trump ordered an investigation rather than immediate action, leading markets to price a low probability of actual tariffs. This continues a pattern of retreat from previous tariff threats, reinforcing the view that Trump is a 'pushover' on trade.
The desk points specifically to the inclusion of value-added tax (VAT) in the reciprocal tariff scope. Donovan argues no country will ever give up VAT — a major revenue source — in exchange for an unreliable US trade deal. This makes the threat hollow, and markets are treating it as such. The alternative read — that the investigation leads to aggressive tariffs — is dismissed as unlikely given Trump's track record.
Where it sits in our coverage
We have no internal coverage data on the relevant currency pair for this commentary. The desk's view is not benchmarked against a firm consensus or specific targets, so this section is omitted.
How other firms see it
We have no per-firm forecasts to group. The desk's view stands alone without aligned or contrary firm references.
What the calendar says
(No high-impact events scheduled in the next 30 days for this jurisdiction.)
Key takeaways
- 01Trump's reciprocal tariff announcement is delayed, leading markets to bet on no meaningful tariffs.
- 02VAT is a non-starter for trading partners; the threat is seen as non-credible.
- 03Additional tariffs on cars and pharmaceuticals may be more likely and could shift the narrative.
- 04US retail sales data today will test consumer health ahead of any tax increases.
Market implications
Watch for further USD weakness, especially against G10 currencies like EUR and JPY. A break below 1.05 in EUR/USD would signal that markets are pricing in actual tariff risk. The retail sales print today could either confirm consumer resilience (USD-supportive) or reveal cracks (bearish USD).
Risks to this view
The call unspools if Trump imposes tariffs unilaterally via social media or executive action, bypassing the investigation. Sudden tariffs on autos or pharmaceuticals would revive USD strength. A strong retail sales number today could also force a short-term USD rally, testing the bearish thesis.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 14th of February. US President Trump made a very big announcement about increasing the trade tax burden on US consumers.
Markets have had to decide whether the President was being a protectionist or a pushover. At the moment, investors are clearly choosing pushover. Trump is basically ordering an investigation into reciprocal tariffs, which could potentially increase the tax burden on US consumers quite significantly.
However, the delay to actually levying taxes mean that markets do not seem to be putting too high a probability on meaningful taxes actually being imposed. Given Trump's previous retreats from tariff threats, the working assumption of most investors seems to be that Trump will not get much out of any negotiations. The reciprocal part of the tariff threat was directed not just at tariffs in other countries, but also other policies like value added tax.
No country is going to even consider giving up a major source of tax revenue like value added tax in exchange for the rather dubious reliability of a Trump trade deal. It would almost certainly be better to cease trading with the US entirely. Things may change and social media posts from Trump have the potential to add volatility, but this is not likely to be seen as market negative at the moment.
There was a negative aspect to the trade chatter, however. Trump mentioned imposing additional taxes on US consumers over and above any reciprocal tariffs by adding what are presumably universal tariffs on imports of products like pharmaceuticals and cars. These are taxes that might very well be imposed and which might also endure.
These taxes seem to be similar to the steel and aluminium taxes that are already proposed. We get a check in on the health of the US consumer before the tax burden was increased with January retail sales data. This is likely to be a confusing data set to read.
The general health of the US consumer has been very good with several years of rising real incomes and consumer balance sheets that allow for additional income to be directed towards consumer spending rather than to savings. There has been the trend towards spending on fun rather than spending on goods, and fun is fairly significantly underrepresented in retail sales figures. At the same time, however, there has been some survey-based evidence that Democrats in particular may have been rushing to buy goods before trade taxes were imposed.
Sources & References
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