Dollar surge prompts global market turbulence amid tariff fears
An analysis of the currency market, conducted by Saxo Bank's chief macroeconomic strategist, John J. Hardy, indicates a sharp strengthening of the U.S. dollar, potentially linked to the president-elect's plans for drastic changes in United States tariff policy.
In his latest report, Hardy offers a detailed analysis of global currency markets. The expert writes that they are observing dynamic increases in the U.S. dollar, which is leading to a sharp weakening of other currencies. Hardy notes that the euro exchange rate fell below 1.0300 and that the British pound dropped significantly below 1.2400. The situation in the treasury bond market is particularly concerning, as yields reach new highs.
Currency interventions in China
Saxo Bank analysts pay particular attention to the Chinese currency's situation. The report states that the People's Bank of China is conducting intensive interventions to prevent the USDCNH rate from breaching the double top level from 2022 and 2023, set at 7.375. Experts emphasise that without these actions, the dollar's exchange rate against the yuan could reach significantly higher levels, potentially causing severe turbulence in global financial markets.
Particular concern is raised by information provided by CNN. According to four independent sources cited by the network, "President-elect Donald Trump is considering declaring a national economic emergency to provide legal justification for a large swath of universal tariffs on allies and adversaries." Such a move would allow the use of the International Emergency Economic Powers Act (IEEPA), granting the president broad powers in trade policy.
Global consequences of American policy
Saxo Bank highlights conflicting media reports regarding Trump's plans. The report states that an article by the Washington Post suggested a more targeted approach to imposing tariffs, while CNN points to the possibility of implementing universal tariffs. Analysts emphasise that uncertainty about the actual shape of Trump's tariff policy is causing significant volatility in the markets.
Experts point to record levels of the ISM Services Prices Paid index for December, which reached a value of 64.4 compared to the expected 57.5. This reading caused a significant increase in the yield of US Treasury bonds, which are approaching the psychological barrier of 5.0 percent - a level last recorded at the end of 2023.
The situation is particularly difficult in the British bond market. Analysts write that the auction of 5-year treasury bonds (gilts) attracted more demand than the previous issue, yet their yield rose to the highest level since the end of 2023, exceeding 4.5 percent. Even more concerning are the readings for 30-year British bonds, which have reached new 26-year highs above 5.21 percent.
The situation in the bond market has a direct impact on the exchange rate of the British pound. The report states that the increase in yields will force the UK government to tighten fiscal discipline, meaning an austerity policy. Experts warn that this could further slow down economic growth in a country already struggling with stagflation.
The euro under pressure
Saxo Bank analysts also point to the EUR/GBP currency pair. The report highlights that recently there has been no significant reaction to the UK's problems, partly because higher yields of British bonds and more restrictive Bank of England policy were already factored in by the market. However, with higher than expected inflation readings in Germany and a global rise in yields, the EUR/GBP exchange rate rose to a multi-week high above the key level of 0.83.
Hardy concludes in his report that the current situation in financial markets requires special attention from investors. Uncertainty related to future US trade policy and the UK's economic problems could lead to further turbulence in currency markets.
