FX alert: Will 'Liberation day' be surgical rather than scorched earth?

Market wrap

US and European equity futures moved higher on renewed hopes that the next wave of Trump-era tariffs, slated for April 2, could be more surgical than scorched-earth. Market sentiment improved— at least enough to spark some headline-driven short-covering relief—as sources familiar with the planning hinted at a more targeted approach than the blanket measures previously floated by the White House.

Asia-Pacific equities mainly traded higher on Monday, mirroring gains in U.S. and European futures, as local investors clung to hopes that the upcoming round of Trump-imposed tariffs would be more surgical than sweeping. While risk appetite flickered back to life, it did so cautiously, with underlying uncertainty still bubbling beneath the surface as markets await clarity on the April 2 policy rollout.

While this latest stance appears narrower and more calibrated than Trump’s earlier rhetoric suggested, let’s be clear: the full scope and scale of the tariff package remains speculative. No official details have been confirmed, and the market is still flying somewhat blind. So, the extent to which the market rally extends could depend on the devil in the details.

However, one would have to think that whatever algorithm—or political calculus—is steering these tariff decisions has been strategically engineered to maximize pain abroad while containing domestic blowback.

In other words, the strategy could be designed to weaponize the trade imbalance by targeting imports where U.S. producers can step in, keeping the economic disruption abroad while framing it as a patriotic boost to the domestic industry. Classic leverage play: maximize geopolitical pressure and minimize voter pain, at least on the surface.

Forex market

The U.S. dollar kicked off the week on the back foot, with the Dollar Index dipping back below the 104.00 handle. The trigger? A Wall Street Journal report indicating that President Trump’s highly anticipated “Liberation Day” tariff rollout on April 2 will be more selective and targeted than initially feared, according to sources close to the administration.

That was enough to prompt some unwinding of last week’s greenback strength, which had been fueled by a combination of U.S. equity resilience, a rotation pause into European assets, and a Fed narrative that remains firmly in wait-and-see mode, not in a rush to cut rates. With trade tensions potentially taking a more tactical form, markets saw room to reassess the immediate risk premium priced into the dollar.

Looking ahead, whether the dollar’s pullback has legs will depend largely on two key dynamics: can U.S. equities reassert momentum, and will Europe find itself squarely in the tariff crosshairs? My view is that if U.S. stocks continue to rally, the dollar has room to re-strengthen, especially given the still-healthy economic backdrop. However, if Europe manages to dodge the worst of the trade fallout, we might see EUR/USD grind a bit higher—but I’d keep expectations in check this week.

I see EUR/USD gains likely capped around the 1.0875–1.0900 zone, as the market has arguably overcorrected the U.S.-Europe growth divergence too fast and too far. Sure, Europe is showing early signs of a rebound, but the so-called “Guns for Butter” fiscal pivot is going to unfold over a decade—not in a single quarter. Meanwhile, the U.S. economy remains resilient, and the Fed isn’t flinching—both factors that should keep the greenback supported on dips.