Investing.com - The US dollar has slipped lower this week amid uncertainty over the extent of US tariffs to be levied by the new Trump administration, but Barclays thinks the foreign exchange market is now assigning too small a tariff premium.
At 09:30 ET (14:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 107.640, and dropped around 0.6% over the course of the last month.
“The lack of aggressive executive tariff orders during the first week of Trump's presidency has led to some 'market relief', away from the heavily positioned dollar,” said analysts at Barclays (LON:BARC), in a note dated Jan. 2.
“We, however, would view this as a local low for the dollar.”
Heading into the inauguration of President Donald Trump, the market was worried that an onslaught of executive orders would see emergency tariffs ushered in, the bank said.
But, not only has President Trump not invoked emergency executive powers in his first few days in office but, in a bizarre twist of events, close economic partners such as Canada have found themselves more aggressively targeted by the president’s rhetoric than China, which has so far enjoyed fairly smooth interactions with the US president (not unlike his first term).
As a result, a level of 'tariff relief' has spread across FX markets, Barclays said, and the bank thinks it’s not the time to give up on protectionist policies, and this selloff may provide another entry point to go long dollars.
Geopolitical concerns have intensified, Barclays said, and a tariff respite now would likely lead to a rapid deterioration in the US trade position.
A comprehensive deal would imply either a 180-degree shift in China's policies or a relaxation in the US's derisking priorities.
To expect a US-China deal, we believe one would need to make at least one of two assumptions: that China is interested in following more inflationary policies, and/or that the US is shifting towards a more relaxed stance after the 2017-2022 intensification of decoupling and derisking pressures.
“Neither assumption is plausible, in our view,” Barclays said.
Perhaps one possible twist is that tariffs are too blunt, inflationary and limited of a tool to capture the full scope of the US policy response to China’s trade and growth policies.
Maybe the US will end up being more nuanced and multi-dimensional, for instance using export controls, import bans and other non-price related tools.
“This, however, doesn’t mean ‘no tariffs’. These tools can work in a complementary fashion,” added Barclays.
“Tactically speaking, it is hard to assert when positioning cleansing will meet a change of sentiment in Trump's messaging to allow re-engaging with the greenback from the long side,” Barclays said. “But such is the nature of the dollar that it is much easier to position (via options for instance) during pull-backs rather than after rallies.”