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Currency markets are increasingly dismissive of Donald Trump’s tariff threats, raising the risk of big swings if the US president follows through on his promise to hit China, Canada and Mexico with levies next week.
Trump’s proposal to bring in levies against the EU and China unsettled the euro and currencies of other US trading partners on Thursday. But the falls were less dramatic than some of the upheavals seen in recent weeks when he began spelling out his plans.
Measures of expected short-term volatility in currencies such as the euro and the Mexican peso have fallen since the inauguration in January.
“Having been burned on tariff trades already this year, investors are less reactive to unsupported tweets” and political rhetoric, said Jerry Minier, co-head of G10 forex trading at Barclays.
Exchange rates have been buffeted by tariff headlines, with the dollar strengthening sharply against currencies of major trading partners on February 3 after Trump announced tariffs against Mexico, Canada and China. But the moves reversed by the end of the trading day after the president postponed the introduction of the levies against the first two countries.
Since then, market moves in response to his announcements have been smaller. Having fallen after Thursday’s broadside, the euro steadied against the dollar on Friday and at just below $1.04 remains well above the low of less than $1.02 touched in early February.
Akshay Singal, global head of short-term interest rate trading at Citigroup, said that after “trusting and believing” tariffs were coming, the currency market “wants to see them in action”.
He added: “Previously it was ‘I believe what you tell me’, and now it is ‘show me.’” The announcement and then deferral of tariffs against Mexico and Canada had shaken investor confidence that tariff headlines could be trusted, Singal said.
Investors’ expectations of swings in euro-dollar over the next month are down about a fifth from their peak in mid-January, according to an index from CME Group based on options prices.
Its index of expected volatility in the Mexican peso has also fallen since January — and is now almost half its level at the US election last year — while the equivalent measure for the Canadian dollar is also down from its early February peak. That is despite looming deadlines such as the tariffs on Mexico and Canada that are due to go into place next week.
“Our models indicate that tariff premium has unwound in recent weeks with little now priced in key [currency pairs]”, said Goldman Sachs in a note on Friday.
One currency trader at a big European bank said work days had become “weirdly slow” in recent weeks.
“Trump will shout about some tariffs, row back from those announcements, the White House will say something totally contradictory and then Trump might post the opposite on Truth Social 10 minutes later,” the trader said. “You can’t trade that.”
Analysts said this inertia had crept into rates markets too, where fears of a boost to inflation from tariffs drove yields higher at the end of last year.
The Ice BofA Move index, a gauge of bond investors’ expectations of Treasury market volatility, is well below the highs reached in the run-up to the US election.
“You would think volatility would be higher given how little clarity the market has now, but the market has become numb to it, until [investors] actually see the path forward,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.
However, some investors and analysts say there is a growing risk that the market is no longer taking the potential economic fallout from tariffs seriously enough, with “complacency” now a danger, according to Barclays’ Minier.
Some believe that expectations of lower volatility make a big sell-off more likely if significant trade taxes are eventually implemented.
The day Trump “does follow through [on blanket tariffs], there would be a knee-jerk reaction, because most people think it is not priced in”, said Finn Nobay, a trader at investment firm Payden & Rygel.
