The yen has been the best performing currency overnight following the release of President Trump’s much anticipated plans for “reciprocal tariffs”. It has resulted in USD/JPY falling below the 147.00-level as it moves back closer to the year to date low of 146.54 recorded on 11th March.
The move lower in USD/JPY has been reinforced by the broad-based sell-off for the US dollar which has resulted in the dollar index dropping sharply to a fresh year to date low overnight of 102.40 and reaching the lowest level since the first half of October. The move lower for the US dollar following the release of President Trump’s “reciprocal tariff” plans highlights that market participants are initially focusing on the negative implications for the US economy rather than the bigger hit to growth outside of the US and increased risk of a sharper slowdown in global growth. Yields on the 2-year and 10-year US Treasury bonds both dropped sharply by around 10-15bps in response to President Trump’s “reciprocal tariff” plans. US rate market participants have moved to price in a higher probability that the Fed will need to more active in cutting rates this year despite higher inflation. There are currently around 83bps of Fed rate cuts priced in by December.
The yen has been the main beneficiary of more risk-off trading conditions after President Trump decided to go big with his plans for “reciprocal tariffs”. The plans revealed that he will impose a 10% baseline universal tariff with higher individualized rates on 60 trading partners who are deemed the “worst offenders” and have higher trade deficits with the US. The universal 10% tariff on all countries will apply from 5th April while the higher individualized rates will become effective from 9th April. There was some relief as the steel & aluminium, and auto & parts tariffs will not stack, and sectors subject to upcoming sectoral 232 tariffs such as pharmaceuticals and semiconductors will be exempt until they are completed. The plans will lift the US weighted average tariff rate up sharply closer to 25% and to the highest level since the Smooth-Hawley Act was introduced in 1930 at the start of the Great Depression.
Tariffs for the “worst offenders” will hit developing economies the hardest. The highest rates applying to Lesotho (50%),Cambodia (49%), and Laos (48%). Countries in Asia face some of the highest “reciprocal tariff” rates including major exporters to the US such as China (34%), India (27%), Japan (24%), South Korea (26%), Taiwan (32%) and Vietnam (46%). For China the 34% reciprocal tariffs will be stacked on top of the 20% of tariffs put in place recently. EU countries will also be hit by a 20% tariff. In contrast, some countries and regions will be hit relatively less by tariff hikes including the UK and Latin American countries who will only have the lower 10% universal tariff applied. Canada and Mexico have also got more lightly. The current 25% tariffs on non-USMCA compliant goods including lower 10% on Canadian energy and potash will be maintained, but if the national emergency related immigration and fentanyl ends, then a lower 12% “reciprocal tariffs” will apply. Importantly the USMCA-compliance exemption will continue to apply helping to curtail the impact on imports from Canada and Mexico.
President Trump has also warned that the “reciprocal tariff” rates could be raised further if countries retaliate which alongside upcoming tariffs on other sectors such as pharmaceutical and semiconductors implies that overall tariff rates on US imports may not yet have peaked. US Treasury Secretary Scott Bessent stated that “as long as you don’t retaliate, this is the high end of the number”. Retaliation from other countries would subsequently increase the risk of an even more disruptive global trade war. On the other hand, President Trump has indicated that he is open to negotiations with all countries. He would be willing to lower “reciprocal tariffs” if countries lower their tariffs on imports of US goods and reduce non-tariffs barriers. Positive negotiations with the US to reduce reciprocal tariff rates in the coming quarters could provide potential positive catalysts for individual currency performance.
Overall, we expect the safe haven currencies of the yen and Swiss franc to continue to benefit from more risk-off trading conditions. The higher tariffs on Japan will though make the BoJ more cautious over delivering further rate hikes. The disruption to global trade will significantly increase the risk of a slowdown in global growth. As we highlighted above Asia will be hit harder by higher tariffs which should lead to regional currencies underperforming. While the US dollar has initially weakened sharply reflecting expectations for a more stagflationary outcome for the US economy which has brought down US rates, it could rebound over time as fears over the outlook for global growth intensify further. As result, we expect the high beta G10 commodity currencies of Australian and New Zealand dollars to underperform. The Canadian dollar is initially rebounding alongside the Mexican peso as both countries got off relatively lightly from President Trump’s “reciprocal tariff” plans. The pound could also outperform the euro on the same basis that the UK was hit less had by relatively smaller tariffs than the EU, but there is also the caveat that the pound tends to weaken more than the euro amidst more risk-off trading conditions.
