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The USD saw losses against all G10 currencies overnight, as markets turn wary of risks to US growth as reciprocal tariffs kick in today. The DXY index has eased towards 98, after softer payrolls and ISM services underscores the negative economic impact from tariffs and associated trade uncertainty. The USD is also likely to be weighed by Fed rate cut expectations, with markets now pricing in a 95% chance of a Fed rate cut in Sep, up from 40% just a week ago.
Trump announced that he plans to introduce sectoral tariffs soon with a 100% tariff rate on semiconductors, and a small initial tariff on pharmaceuticals that will eventually be raised to 150%, and finally to 250%. Importantly, countries which had acceded to trade deals with Trump, including Japan and Korea, could enjoy significantly lower tariffs for their semiconductor exports. This implies a remarkable competitive advantage for both compared to other Asian economies. Korea has already highlighted that its semiconductor companies will not face the 100% tariff rate, and we expect both KRW and JPY to be resilient, or even appreciate, despite these sectoral tariffs. On the other hand, RMB may be on the backfoot against regional peers, though China’s trade truce with the US is likely to be extended.
India could see a doubling of its US tariff rate in the coming weeks, with Trump announcing a secondary tariff rate of an extra 25% due to India’s purchases of Russian oil. India may not be the only country purchasing Russian oil, but Trump is certainly looking for ways to pressure Russia, having threatened Russia with further economic sanctions if it does not agree to a ceasefire by this Friday. As such, US secondary tariffs imposed on India may not be easily negotiated away without a broader geopolitical deal, or a complete stoppage of Russian oil imports. Meanwhile, media reports indicate that Indian mobile exports to the US will not face either the reciprocal tariff or secondary tariff but are subject to the forthcoming semiconductor sectoral tariff. USD/INR could hold above mid-87 levels amid elevated secondary tariff risks.
Chang Wei Liang
FX & Credit Strategist
[email protected]Quote of the Day
“If I see three oranges, I have to juggle. And if I see two towers, I have to walk.”
Philippe Petit
August 7 in history
In 1974, French Philippe Petit walked a tightrope strung between the Twin Towers of the World Trade Center in New York City at a height of 1,350 feet.
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