USD: The prospect of the US withdrawing its security umbrella from Europe is a crisis – ING

The trade-weighted Dollar Index (DXY) broke decisively under 106 yesterday as European currencies rallied on the prospects of major fiscal stimulus. Critics say that European leaders only react in a crisis – and certainly, the prospect of the US withdrawing its security umbrella from Europe is a crisis. The two significant events here yesterday were: a) the European Commission triggering national escape clauses from the Stability and Growth Pact, which could unlock EUR650bn of national spending and other measures totalling EUR800bn, plus b) German leaders agreeing on a suspension on the debt brake and unleashing a EUR500bn infrastructure fund, ING’s FX analysts Chris Turner notes.

DXY looks vulnerable to the 105.10/40 area

"Expect more focus on the above at a European Council meeting today. The prospects of significant European fiscal stimulus come at a time when new US tariffs were dragging many global equity markets some 2-3% lower, sending two-year Treasury yields under 4.00% and undermining the dollar. In his State of the Union address overnight, US President Donald Trump warned that tariffs were going to cause a 'little disturbance'. And it's that disturbance which has weighed on US activity and the dollar so far this year."

"Not helping investors has been the whipsawing on tariff policy. USD/CAD traded over 1.45 a couple of times yesterday as a US-Canada trade war broke out. Yet later in the day, US Commerce Secretary Howard Lutnick said that the US could announce, potentially today, a pathway for tariff relief based on Canada and Mexico's position in the USMCA accord. It really is hard to take a definitive position on all this. However, we would say that the new US administration has earmarked significant tariff revenues for its policy programmes meaning that tariffs may well be slow to reverse and look highly likely to be broadened in April."

"Where does this leave the USD? It is probably still a little vulnerable to any weaker US activity data through March before the tariff story once again dominates in April. The focus this week will therefore be on Friday's February US jobs report. Before then, today sees the ADP employment figures, but also the ISM Services index. The latter occasionally moves markets. In theory, this services index should be less affected by tariff noise and, barring any surprise weakness, today's US data should not prove a threat to the dollar. DXY looks vulnerable to the 105.10/40 area – but a major clear-out of dollar longs to the 104.00 area probably only comes on a significant miss in Friday's NFP report."