Tariffs, geopolitical uncertainty and economic concerns are influencing FX markets, analysts say.
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A worsening outlook for the U.S. economy and expectations for further market volatility are driving shifts in currency valuations — with market watchers divided on which currencies they see as firm safe havens.
Geopolitical developments from just this month have seen U.S. tariffs on Canada, Mexico and China come into affect, President Donald Trump’s reported pause on military aid to Ukraine, softer U.S. economic data out of the U.S. and European leaders committing to ramp up defense spending.
Jane Foley, head of FX strategy at Rabobank London, told CNBC via email on Tuesday that she was expecting the British pound and the Japanese yen to be winners in the current environment.
“The fact that U.S. data suggests that a modest trade surplus exists with the U.K. suggests that the latter is unlikely to be in Trump’s sights and GBP is likely on course to continue grinding higher versus the euro,” she said. “That said, it is stretch to call the pound a safe haven.”
Trump hinted after a meeting with British Prime Minister Keir Starmer last week that the U.K. may be able to avoid becoming a target of U.S. tariffs.
Sterling was trading at $1.2712 at 10:19 a.m. London time on Tuesday, marking a rise of 0.1% against the U.S. dollar, but fell by around 0.1% against the euro. Since the beginning of the year, the British currency has gained 1.6% against the greenback, according to LSEG data.
British pound vs U.S. dollar.
“Japan also has a strong hand in dealing with the U.S.,” Foley told CNBC. “Although Japan has a trade surplus with the U.S., it is the largest holder of treasuries outside of the U.S. and is the biggest provider of FDI [foreign direct investment] to the U.S. [Prime Minister Shigeru] Ishiba has already pledged to increase investment flows into the U.S. and Japan’s growing defense budget is almost all spent in the U.S.”
Foley also noted that Japan’s policy environment favored the yen, which has gained 5% against the greenback since the beginning of the year.
“Insofar as Japan’s fundamentals have improved and given the Bank of Japan is the only G10 central bank with a tightening bias, I expect the [yen] to perform well this year which will probably strengthen its credentials as a safe haven,” she said.
David Roche, a strategist at Quantum Strategy, agreed that current conditions bolstered the Japanese currency’s long-held status as a hedge against volatility, suggesting that geopolitical instability in the West could cement it as “the new safe haven.”
Speaking to CNBC’s “Squawk Box Europe” on Monday, Roche discussed the fallout from Trump and Vice President JD Vance’s public confrontation with Ukrainian President Volodymyr Zelenskyy in the Oval Office last Friday.
Roche argued that the Trump administration’s policies could see the greenback dethroned as the FX market’s safe haven.
“The big loser is actually the U.S., because nobody will trust a U.S. treaty again,” he said of the U.S. backing away from supporting Ukraine. His comments came before a White House official told media on Tuesday that the U.S. had paused all military aid to Ukraine.
“You want to keep out of the euro and own the yen, which is now the new safe haven as the U.S. is getting to look very dangerous.”
Kamal Sharma, FX Strategist at BofA Global Research, took a different stance to Roche on the euro, and argued that the impact of Trump’s tariffs may have a limited impact on currency markets.
“FX has taken the overnight announcements largely in its stride, though the tone in G10 FX is slightly defensive this morning with the [Swiss franc] leading the gains versus USD and even [the Canadian dollar] recouping some of the initial losses,” he said in emailed comments on Tuesday. “High beta G10 FX are under some pressure, particularly the antipodeans on the China proxy.”
“We’ve used the term ‘Tariff Purgatory’ to describe how markets have been on alert for implementation since the start of the year,” Sharma added. “The announcements were therefore not totally unsurprising in the context of what has already been said. Part of the narrative now is that overnight developments put the ball firmly in the court of the EU and there is more urgency to step up defence spending, and this is helping European stocks and [the euro] via higher [bond] yields.”
However, Dominic Schnider, head of global FX and commodity at UBS Global Wealth Management, argued against the case for the Swiss franc rallying on the back of developments across the Atlantic.
“The franc’s ‘safer-haven’ appeal is diminishing as geopolitical concerns ease, and investors may shift more significantly toward higher-yielding currencies such as the [Australian dollar] and [British pound],” he said.
“The Swiss franc’s total return outlook is not compelling, in our view, and while it should trade sideways versus the euro for most of the year, the franc remains under pressure against better yielders,” Schnider added.
Meanwhile, Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, told CNBC’s “Street Signs Europe” on Monday that he still expects the dollar to rise. Since the beginning of the year, the dollar index — which measures the U.S. currency against a basket of major rivals — has shed 2%, after rising by 7% over the course of 2024.
“We do think there’s still upside… the [U.S.] dollar,” Mueller-Glissmann said. “I know the dollar becomes a different story now… with the rest of the world looking better. But if you want to look at safe haven FX, one currency which hasn’t done anything for the last nine months is the Swiss franc — our team has looked a lot into the impact of tariffs on Switzerland, and it might actually be lower than what you get for the EU or for a lot of other countries.”
