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Where Money Flows – Jan’25

Déjà vu: Dollar Rally, Retreat on the Anvil??

* President Trump and Dollar’s Déjà Vu: The current scenario brings a sense of "Déjà Vu." Following Donald Trump’s 2016 election victory, the Dollar experienced a significant two-month rally, only to retreat subsequently. A similar trajectory may be unfolding now, with the Dollar index showing signals of a Peak around 110. It seems to us that we on the cusp of an encore. We enumerate factors supporting out rationale:

* 10% Ascent and breach of +2nd Std. Dev suggests a Peak: The Dollar Index has displayed notable patterns over the past decade, with a tendency to peak after achieving gains of 10-12%. This trend, observed across several instances in the last ten years, highlights a consistent performance metric for the index. The current move in the Dollar Index has already registered a 10% rise, leading to a breach of the +2nd standard deviation, which suggests to us that the greenback is on the cusp of a Peak.

* Dollar is Becoming less Volatile: Volatility of the Dollar Index has been subsiding over several decades, with the current decade marking the lowest levels in 70 years. Specifically, the volatility observed over the past two years is below the 10-year average, further underscoring this long-term trend of diminishing fluctuations.

* Dollar Rally is based on Trump’s aggressive posturing, but the bite could be less bad than the Bark. Our Thoughts on US Tariffs…

* Tariffs Are No Swiss-Knife, Trump Will Stitch Trade Deals: U.S. President Donald Trump’s rhetoric on imposing tariffs on various nations has reignited global apprehensions about trade policies. However, tariffs are not a universal tool that can be wielded effectively in all circumstances. Vibes from Trump 2.0 regime inauguration suggest a shift from the aggressive tariff policies of his first term towards a more balanced approach that includes trade negotiations. While tariffs may remain a part of his policy toolkit, their application is expected to be more restrained and strategic

* The Evolution of Trump's Trade Strategy: During Trump’s first term, his administration employed tariffs as a primary tool to address perceived trade imbalances and protect national interests. While these measures disrupted global trade, they also set the stage for potential negotiations. For example, the U.S.-China trade deal negotiations in early 2020, though ultimately disrupted by the COVID19 pandemic, highlighted a willingness to engage in dialogue, with China committing to increased imports of American goods. In his second term, Trump’s approach is expected to evolve. The world is now better prepared to engage with the U.S. on trade matters, with several nations signaling openness to reducing import duties or increasing imports from US to foster better relations. This readiness could lead to a shift in Trump’s strategy from imposing blanket tariffs to crafting more nuanced trade agreements.

* Targeted Tariffs: The “Small Yard, High Fence” Principle: While tariffs may still play a role, Trump’s administration is likely to adopt a more targeted approach. Following the “Small Yard, High Fence” principle, tariffs and restrictions would be concentrated on sectors that pose risks to economic and national security. This strategy ensures that measures are precise and limited, minimizing unnecessary disruption while addressing critical concerns. China, a focal point of Trump’s trade policies, is expected to face targeted tariffs on key sectors, particularly those tied to advanced technology or industries deemed strategically significant.

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