By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Deep uncertainty, thin patience
Investors dumped U.S. stocks and the dollar on Tuesday as the optimism of the recent rebound continued to fizzle, and was replaced by renewed pessimism about the economic and market damage from the global trade war.
The surge in Asian currencies over the last few days caught many investors off guard, and highlights the acute challenges policymakers in the region face. More on that below, but first, a roundup of the main market moves.
I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Absent tariff clarity, nerves fray
After a few weeks smoldering in the background, investors’ worries over trade, tariffs and growth are very much back on the front burner.
Figures on Tuesday showed the U.S. trade deficit swelled to a record $140.5 billion in March as businesses increased imports to beat the tariffs. Imports from 10 countries hit record highs but purchases from China fell to a five-year low, a result of Washington’s 145% tariffs on its main economic rival.
Carl Weinberg, chief economist at High Frequency Economics, calculates that the deficit widening at that quarterly rate drags down GDP by two percentage points on an annualized basis. “Ouch!”
This set the tone. Although stocks briefly recovered some losses after U.S. President Donald Trump said he would make a “very big” announcement before his visit to the Middle East next week, Wall Street was in the red all day.
Short-dated bond yields and the dollar fell, the yield curve steepened and gold prices rose more than 2% for a second day to within sight of last month’s record $3,500 an ounce.
This is the backdrop against which the Federal Reserve began its two-day policy meeting. It will almost certainly hold the line on Wednesday, with Chair Jerome Powell expected to say more incoming data is needed before deciding the next move. Traders are betting the Fed will resume its easing cycle in July, but some economists reckon high inflation will prevent any rate cuts at all this year.
On the trade front, U.S. Treasury Secretary Scott Bessent said agreements with some of the United States’ largest trade partners could be unveiled as early as this week. Markets are reluctant to get too excited though – the fact remains, Washington has yet to announce a single trade deal.
One was announced on Tuesday though, between Britain and India. However, it should be noted that the on-and-off negotiations had been underway for three years, and the projected 4.8 billion pound boost to Britain’s economy by 2040 is less than 0.2% of last year’s GDP of 2.6 trillion pounds.
Trade talks can be tough, and the final agreements not always particularly earth-shattering.
Asia FX surge raises doubts about region’s trade war arsenal
The Taiwan dollar’s record rise in recent days has brought a regional conundrum into sharp focus: how much appreciation can Asian currencies countenance in the face of U.S. President Donald Trump’s global trade war?
Currency depreciation would typically be the weapon of choice for Asian policymakers seeking to mitigate the export and growth shocks caused by a trade war. But many Asian currencies are moving in the opposite direction.
The Taiwan dollar’s 6% rise against the greenback over Friday and Monday marked a record two-day spike. It’s unclear what sparked the surge of capital into a market that was ‘long’ dollars and unhedged. Many analysts say it was speculation that Taiwan had agreed to allow its currency to strengthen as part of an upcoming trade deal with Washington, a claim Taiwan’s central bank and president have strenuously denied.
But regardless, what matters is that the Taiwan dollar’s jump didn’t come in isolation, raising doubts over Asia’s willingness or ability to use FX as a trade war shock absorber.
CONTAGION
In parallel with the Taiwan dollar’s record move in recent days, the South Korean won on Monday also clocked its biggest two-day rally in 15 years, while China’s offshore yuan hit a six-month high. China’s markets reopened on Tuesday for the first time since Thursday, and the onshore renminbi gapped sharply higher too.
On Saturday, the Hong Kong Monetary Authority sold HK$46.54 billion ($6 billion) of local currency to prevent it from strengthening beyond its official band between 7.75 and 7.85 per U.S. dollar. That was the HKMA’s first such action in four and a half years and its largest-ever intervention in the FX market.
And even though the Indian rupee, Indonesian rupiah and Vietnamese dong were all recently at record lows against the U.S. dollar, they have begun to ride the continent-wide crest of rising currencies in recent days, especially the rupee.
‘RIPPED OFF’
This is exactly what Trump wants. Some of America’s biggest bilateral trade deficits are with Asian countries who Trump says have “ripped off” the U.S. for years, in part, because, he argues, they have kept their exchange rates artificially weak through central bank intervention and by accumulating huge foreign currency reserves.
Indeed, six of America’s top 10 bilateral trade deficits last year were with Asian countries, topped of course by China. America’s combined deficit with these six countries last year was more than $650 billion.
It’s also true that many Asian countries closely manage their currencies to varying degrees or regularly intervene in the market ostensibly to limit volatility but implicitly to exert some control over the exchange rate.
How much any of this is ‘fair’ or ‘unfair’ trade is highly debatable. But what is not up for debate is that the region will face immediate challenges in an environment where the question is how far Asian countries can let their exchange rates rise.
CROSSROADS
All else being equal, a strengthening currency will make these countries’ exports less competitive on the international market, but appreciation could be a price worth paying if it secures less punitive trade deals with Washington. The weighted average U.S. ‘reciprocal’ tariff on Asia is over 40%, up from around 12% before Trump’s trade war, MUFG analysts estimate.
On the other hand, intra-Asian trade is more important than ever, expanding 43% over the past four decades to more than half of all Asian trade, according to the International Monetary Fund. Consequently, ceding some competitive advantage to the U.S. via the dollar exchange rate will be less meaningful than relative regional competitiveness. This may limit Asian countries’ tolerance for local currency strength.
The other issue Asian policymakers may struggle with is dollar weakness more broadly. There was a widely held belief in the months surrounding Trump’s election win last November that his tariff agenda would stoke U.S. inflation, force the Federal Reserve to raise interest rates, and therefore boost the dollar.
But while price pressures and inflation expectations have indeed intensified in recent months, U.S. growth is weakening, and markets expect the Fed to cut rates this year. On top of that, a risk premium has been built into the dollar’s price as Trump’s erratic and controversial policies have prompted many investors to reassess their willingness to hold U.S. assets.
Considering all this, Asian policymakers face huge challenges in determining how best to respond to the U.S. trade salvos. But one thing is for sure, ‘weaponizing’ FX may no longer be the obvious option.
What could move markets tomorrow?
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.
(By Jamie McGeever, editing by Nia Williams)
Comments