Keeping track of US tariff rate implementation is proving extremely complex as every week there is one or another events which changes the contours of the tariff event on global macros. Beyond the last week headlines of court decisions, we continue to think that it will be hard to move away from the 10% tariff floor for major trading partners (in addition to sectoral tariffs), given President Trump’s consistent focus on trade, the signal from the UK-US deal, and the increasing focus on revenues in Washington given the large deficits. Also potential changes to tax rates on foreign individuals & companies in the draft fiscal bill going to senate do not augur well for DXY. Also repatriation is not required for further Dollar depreciation if prospective allocations are more balanced. Large investor positioning in US assets is a powerful theme that could prompt more FX hedging (i.e., sell USD forwards) in coming months. There is also the risk of an eventual sustained reduction in US asset holdings from longer-term investors. Another key issue is USD’s shifting correlation with other assets, which may lead to a shift in FX hedging requirements (i.e., more USD selling) by foreign investors. Reason being a fall in US equities is no longer offset by a rise in USD for foreign investors. Recent USD weakness alongside higher US yields points to a broader lack of confidence in USD assets too. Though there might be intermittent rounds of DXY strength based on news flow from Trump, broad DXY weakness might be the theme for H2CY25. For reasons of current policy uncertainty, past significant inflows in US assets in last 2 years as well as consistent fiscal issues of US, we expect the broad DXY weakness to continue. EUR then JPY in our view might be the best bets to play for DXY weakness in near term.
