US Dollar Strength Eases After Trump’s Tariff Threats: A Tactical Move for Better Deals

Investors Shift Away from Strong Dollar as Tariff Risks Lose Momentum

The value of the US dollar has begun to soften as market sentiment shifts regarding President Donald Trump’s tariff threats. Initially seen as a tool to force favorable trade deals, the tariff risks are now being interpreted as part of Trump’s broader strategy rather than as a core economic policy, leading to a reduction in bets on a stronger dollar.

The Dollar Index, which tracks the strength of the US dollar against six major currencies, has fallen to its lowest point in two months, touching 107.11 as of 2:17 PM Seoul time on February 14. This marks its lowest level since December 17, 2024. The dollar index has decreased by 1.67% since the beginning of the year, contrasting sharply with the 8% surge it experienced between late September and the end of 2024, driven by growing expectations of Trump’s victory in the presidential election.

According to Bloomberg, concerns about the actual effectiveness of the tariff risks have led to investor fatigue with the US dollar. The report highlights how the belief that Trump’s tariff imposition is more of a negotiation tactic to secure better trade terms has led to growing skepticism about its broader economic impact. There is now a decreased likelihood that tariffs will significantly accelerate inflation in the US, further diminishing the strength of the dollar.

The shift away from a strong dollar could be the beginning of what analysts call "unwinding" of dollar bets. Char Chu-Channa, Senior Investment Strategist at Saxo Markets in Singapore, told Bloomberg that the dollar’s rise, fueled by America First policies and trade threats, may be running out of steam. “Now, it’s clear that the tariffs are more targeted measures rather than sweeping actions driven by national security or fairness concerns,” Char stated, emphasizing that tariffs are not as broad as previously believed.

Trump’s recent strategy has also shifted from broad, across-the-board tariffs to a more focused approach of “reciprocal tariffs.” Under this plan, the US Trade Representative (USTR) and the Secretary of Commerce are instructed to propose new tariffs based on individual countries’ trade relations with the US. This move has further fueled uncertainty about the potential economic impacts of the tariffs.

This change in the outlook for the US dollar signals a potential failure of the so-called “Trump Trade” that had been driving market optimism. The “Trump Trade” was based on the assumption that his policies would suppress interest rate cuts, limit the growth of US trade partners, and push down the value of other currencies. However, recent analysis suggests that the expected reshaping of trade flows and the weakening of other currencies has not materialized as anticipated.

Financial Times analysts point out that investors are now re-evaluating the impact of Trump’s policies on the US economy, realizing that the intended benefits may not come to fruition. Jerry Minier, co-head of foreign exchange trading at Barclays, told FT, “As the Trump trade has tapered off at the start of the year, it hasn’t worked as expected, and investors are reassessing its efficacy.”

Despite the recent shift in sentiment, some experts believe the current weakening of the dollar may be a temporary phenomenon. The US economy remains strong, and the potential benefits from the ongoing trade wars could still fuel dollar strength in the long term. The Commodity Futures Trading Commission reported that hedge funds maintained their strong dollar positions last week at levels not seen in several years.

Carol Kong, a strategist at Commonwealth Bank of Australia, told Bloomberg, “We haven’t yet reached the peak of tariffs. If the market realizes that Trump’s threats are credible and high tariffs are imposed, the dollar could strengthen again.”