The USD bear case awaits confirmation.

Tariffs, tariffs, tariffs.
The fuss coming into this week outside a lopsided Super Bowl victory for the Philadelphia Eagles is over the latest Trump tariff announcements as he threatened 25% tariffs on all steel and aluminum imports. The steel imports are rather minor, as steel imports make up less than 15% of US steel consumption. The aluminum imports are another matter, as the US imports over half of its consumption, suggesting that if this is followed through, the US sees it as a matter of national economic security that it ensures greater domestic production. As usual, many details are lacking, but 25% steel and 10% aluminum import tariffs are already in place from Trump’s first administration, with many subsequent exceptions for the EU, Canada and Mexico and other countries carved out. Canada is a big focus on whether Trump follows through here, as the US imports some 40% of its supplies from the country. So far the market is taking the news quite calmly after an initial spike in USD strength on the open.

Watching for the US dollar bear case to spread beyond USDJPY
As outlined in part in my prior update and on our more recent Saxo Market Call podcast, the USD bear case can be made if the Trump administration and US Secretary of Treasury Scott Bessent make good on cutting US fiscal outlays to a sufficient degree to rein in US deficits, which also risks tilting the country into a recession later this year. As fiscal excess has been a strong contributor to US growth outperformance, fiscal drag would do the opposite before the hoped for growth boost from deregulation and possibly tax reform delivers growth perhaps in 2026 or beyond. It does appear between the lines that the Trump administration understands the need to get the country’s finances in order. But it is the tallest of tasks – the biggest spending is on interest/debt-service and basic non-discretionary items that are politically toxic to touch, especially Social Security. Medicare and Medicaid are a bit more interesting if the Trump team takes the approach of strong-arming drug- and healthcare providers to lower their prices. Federal tax revenue for 2024, a stellar year for capital gains tax revenue due to soaring equity markets, is estimated at USD 4.9 trillion, but with spending outlays of USD 6.8 trillion.

Timing the above scenario could prove difficult and there are only halting signs of a turn in the US dollar thus far, with USDJPY the only major USD pairs that has executed a convincing bearish turn (thus far – needs to stay below perhaps 156.00 and Bessent needs to deliver on keeping that 10-year US treasury yield tamed.) Below we look at what EURUSD will have to do to suggest a larger turn in the US dollar is under way. AUDUSD is a bit closer, by the way, with an interesting pop in key commodities price like copper supporting the Aussie.

A further complicating factor is the threat of Trump tariffs and trade war fears, which can buffet the market from headline to headline. I believe that the Trump team’s chief aim is to ensure economic security and self-sufficiency in key industries as a national security priority and to force its neighbors north and south of the border to help the US in a new drug war and to reduce China’s influence, from contributing illegal drug chemicals to the US drug crisis to its economic and political footprint in the Americas in general, a kind of new Monroe Doctrine. At the same time, the intent is to allow Europe to fend for itself more by withdrawing the bulk of the US commitment to the post-WWII security umbrella over Europe. That means targeted tariffs and tariffs as a negotiating tool rather than broad tariffs or a trade war.

Elsewhere, the fiscal needle generally points in the direction of more expansion, especially on national and economic security imperatives in Europe that follow on from the above, which will expand further if the EU contributes to the rebuilding of Ukraine on an assumed cease-fire/armistice scenario. Another potential contributor to the US dollar losing steam this year is any reversal in Mag 7 stocks and the AI-driven story if momentum in the sector falters more broadly after the recent Nvidia stumble.

Chart: EURUSD
EURUSD tried to post a climax reversal on Trump’s recent 25% tariff threat against Mexico and Canada that was then quickly punted for a month. The rejection of the sub-1.0200 lows was swift, but the back-filling here keeps the suspense high on whether this was a real reversal or mere headline-driven volatility. First steps for bulls will be a close well north of 1.0400 to stabilize the recent softness, but the 1.0500-1.0600 zone marks the key zone that decides the trending status for the pair. The top of that zone was near the 2024 low. To the downside, a close below 1.0300 keeps the risk in place that the pair tests the cycle lows again.