The market is figuring out that it’s better to sell the US dollar in the trade war

The knee-jerk reaction to Trump threatening tariffs on the EU was to buy the US dollar on a number of fronts but that’s quickly faded. Cable is now trading near the highs, AUD has bounced all the way back and the loonie is at its best levels.

Even the euro — which is the target of the tariffs — has rebounded 35 pips and is still up a half-cent on the day.

The trend so far this year has been to sell the US dollar as the US breaks the global consensus on trade. That should be the result of this round of tariffs as well.

Naturally, some people will be looking to buy the dip but that’s tough to time. It’s certainly early at the moment but if you believe Trump will ultimately back down then it’s never too early. He left himself an out by waiting until June 1 and it’s notable that there is a call scheduled today.

The EU doesn’t have the backbone for a fight in the way that China does so this could go badly for them if they roll over. That said, it’s tough with so many voices in Europe. If they do fight, it could embolden the Chinese, Japanese and others as well.

Again, these are all risks for the US economy and US dollar. I don’t see how the Fed gets any closer to cutting rates now and I don’t see how US businesses will be more-willing to invest or hire in light of this development.

So far, the clearest trades are buying the yen, Swiss franc and gold.

This article was written by Adam Button at www.forexlive.com.