Dollar flexes its muscles, dominating G10 currencies on Tuesday

Asia wrap

Europe’s "Guns & Butter" debate or Xi’s "Billionaire Charm Offensive"—it’s not hard to guess which door Asia’s investors walked through. With Xi’s rare sit-down with China’s top tech titans fueling the Tech renaissance rally, Asian stocks are on the rise, riding a wave of renewed confidence in China’s private sector. The message? Tech is back in favour, and Beijing is ready to play ball. It is no surprise that Asia investors are choosing stimulus-fueled innovation over Europe’s existential defence spending dilemma.

The great EU divide

You really can’t make this stuff up. European leaders gathered in Paris for what was billed as a “decisive moment” in the continent’s history—only to deliver yet another masterclass in indecision. The big sticking point? Whether to send troops to Ukraine to enforce a ceasefire.

German Chancellor Olaf Scholz left the meeting visibly irritated, calling even the discussion of troops on the ground “an incomprehensible debate at the wrong time and about the wrong topic.” Italian PM Giorgia Meloni was equally unimpressed, calling the whole thing “perplexing.” Spain and Poland? Also against. Meanwhile, Emmanuel Macron—who floated the idea of boots on the ground a year ago—proposed a “reassurance force” instead.

And Britain? Prime Minister Keir Starmer backed Macron, declaring he was “prepared to consider committing British forces on the ground, alongside others.” That drew a nod from Denmark’s Mette Frederiksen, who called it “positive” and said Copenhagen was “open to discussing many things.” Keep in mind, Denmark has been one of Ukraine’s strongest military supporters throughout the war.

After all that, the final takeaway? An EU official summarized that leaders “agreed they were ready to provide security guarantees,” but with “modalities to be examined with each party, depending on the level of American support.” Translation: They’ll think about it later, depending on what the U.S. does. If this isn’t a political vacuum or a rudderless ship at the most critical moment to define Europe’s role on the global stage, I’m not sure what is.

The real negotiations are happening

Meanwhile, across the world in Riyadh, real negotiations are happening—without Europe at the table. U.S. and Russian officials are set to meet on Tuesday for the first high-level talks aimed at ending the war in Ukraine since early-stage negotiations collapsed nearly three years ago. And the elephant in the room? Washington’s apparent willingness to make preemptive concessions to Moscow.

The U.S. has already dismissed Ukraine’s NATO aspirations and, from the looks of it, is backing away from Kyiv’s demand to fully regain occupied territory. European allies, blindsided by the rapid pace of developments, now fear that Donald Trump is looking to cut a deal that leans heavily in Vladimir Putin’s favor.

This leaves Europe with two brutal realities to confront: First, they’re being sidelined from the biggest geopolitical negotiation on their own continent. Second, if this deal goes through, the EU will be forced to reckon with an outcome it had no hand in shaping.

Forex markets

The dollar flexed its muscles against all G10 peers on Tuesday, riding a wave of higher yields as US Treasury markets reopened after the Presidents’ Day holiday. The benchmark 10-year yield climbed four basis points to 4.5%, reinforcing the narrative that rate cuts aren’t coming anytime soon.

Fueling the dollar’s rally was Fed Governor Christopher Waller, who threw cold water on early rate-cut hopes. His message? The recent economic data just isn’t convincing enough—progress on inflation needs to be clearer and more sustained before the Fed even thinks about easing policy.

For bond traders, that meant recalibrating expectations once again. For FX markets, it meant one thing: the dollar still has some mojo in the tank , at least for now.

We had initially planned to pivot back into long dollar positions in early March, expecting peak dollar strength to align with peak tariffs. ( FX traders typically start positioning 4 to 8 weeks ahead) But the move has kicked off sooner than anticipated. The tariff drumbeat isn’t fading—in fact, it’s getting louder. The White House is doubling on reciprocal tariffs, scrutinizing all trade relationships where barriers exist against U.S. goods. A full report is expected by April 1st, setting up markets for a potential reality check in the coming weeks.

That said, the geopolitical wildcard remains the US-Russia peace summit in Riyadh. If meaningful progress is made, the euro could get a much-needed boost. However, traders are growing weary of chasing the recent dollar pullback, especially with Europe mired in political disarray and Fed Governor Waller dousing hopes for imminent rate cuts.

And if history is any guide, markets should be paying close attention—once the inflation genie is out of the bottle, she doesn’t slip back in quietly. It usually takes a relentless campaign of higher-for-longer interest rates to force her return. That’s a scenario the Fed, and by extension the dollar, may be bracing for.

Before today’s mini dollar-buying frenzy, the DXY index had slipped just over 3% from its early January highs, as markets convinced themselves that Trump’s trade threats were more bark than bite. Mexico and Canada got a temporary pass, and softer-than-expected January retail sales hinted at a sluggish start to 2025 for U.S. growth. Meanwhile, Japan stunned with blowout Q4 GDP numbers, fueling the idea that the U.S. isn’t the only game in town.

But let’s not get ahead of ourselves. A closer look reveals that much of Japan’s growth surge came from net exports—translation: they’re dining out on U.S. demand. And with Japan alone accounting for a cool $68 billion chunk of America’s eye-watering $1.2 trillion goods trade deficit in 2024, you can bet that’s now painted squarely on Trump’s tariff target list.

So, how much further does the dollar need to correct? Short answer: not much. The trade war drumbeat is only getting louder, and last week’s structured rollout of "reciprocal" tariffs makes it clear that substantial duties are locked and loaded for Q2. And while markets have already priced in plenty of tariff noise, history says one thing loud and clear—tariffs, especially broad-based ones, are a tailwind for the dollar.

Even after an eye-popping 10% greenback rally between October and January, the stage is set for another leg higher. Anyone betting on a smooth dollar fade might find themselves on the wrong side of history.

In case you missed it, the Reserve Bank of Australia has just pulled the trigger on its first rate cut since November 2020. And yet, the AUD/USD is barely budging—trading essentially flat. That tells you everything you need to know: this move was priced to perfection. The market saw it coming, digested the forward guidance, and shrugged.

I haven’t been actively trading the Aussie for eons, so I won’t waste time crafting a view here. But the price action speaks volumes—no fireworks, no panic, just a market that was already one step ahead of the RBA pricing in a bit of a less dovish hold.