Tariff Risk Looms Large

Tariff risks are driving the USD strength, creating uncertainty for global markets and weakening major currencies like the EUR and JPY. Tactically, we are now negative on the EUR, JPY, GBP, SEK and turn positive on the CAD, AUD and NOK.

We see continued US dollar strength through Q1 2025, supported by superior relative growth, higher yields, and its appeal as a safe haven amid Trump’s tariff risks. At the time of writing, President Trump announced tariffs on Colombia, Mexico, and Canada, only to delay or rescind them shortly after. We believe that structural tariffs on Mexico and Canada are unlikely, while Europe and China will likely face some permanent tariffs, though the exact level remains negotiable. That said, it is clear that President Trump will continue to threaten major tariffs, maintaining a relatively high level of uncertainty for trading partners and markets, which should continue to support the US dollar.

Our view on the euro has shifted to negative this month in response to the ongoing growth struggles, lower short-end yields, US tariff risk, and regional political risks in Europe. These factors also likely cap any meaningful gains for the Norwegian krone and Swedish krona. The British pound has been supported over the past year by relatively hawkish Bank of England (BoE) policy expectations but at this point we see a strong case for BoE rate expectations to reset lower pulling down the GBP as the economy stagnates and inflation gradually recedes. Overall, we see material downside risks for the euro, pound, and franc versus the rest of the G10.

The yen is unlikely to appreciate significantly against the US dollar until US yields turn lower. However, it is poised to outperform against the G10 currencies (excluding the US dollar) as yields outside the US are more constrained by lackluster growth, a less attractive monetary and fiscal policy outlook, and disinflation. As a result, we continue to favor long yen position against the Swiss franc, but it also looks increasingly attractive versus the euro and British pound.

US Dollar (USD)

Despite the recent pullback in the US dollar due to reduced near-term tariff risks, it remains our top-ranked currency. Strong economic growth, high yields, and its status as a safe-haven asset amid ongoing tariff concerns continue to support the dollar’s dominance.

Our more positive US outlook — set against near stagnation in the UK, European Union (EU), and China — makes it very hard to sell the dollar in the near term though it remains a consensus long trade and is at risk of periodic, temporary corrections lower.

Despite our current long-dollar bias, we foresee the conditions for a weaker dollar later in 2025, possibly as soon as Q2, although the exact timing is uncertain. Factors that could weigh on the dollar include lower inflation, a potentially disappointing level of fiscal stimulus, softer labor markets driven by reduced government hiring, less enthusiasm for US mega-cap stocks (considering the DeepSeek effect), and less dramatic tariff policies

Our long-term views remain unchanged. We have consistently held that the US dollar is likely to decline by at least 10–15% over a two-year horizon, as US yields and growth revert toward the G10 average, and the country grapples with substantial fiscal and current account deficits. If historical patterns repeat, any Trump stimulus will likely accelerate the build-up of US debt, pointing to a more challenging long-term outlook for the US economy, corporate earnings, and the dollar. For an investment horizon of more than two years, we favor short US dollar positions.

Canadian Dollar (CAD)

We expect the Canadian dollar to trade in a range of 1.42–1.46 against the US dollar, with a bias toward the higher end of the range once the current relief rally subsides. In contrast, we foresee better Canadian dollar performance against the broader G10 currencies, supported by improvements in Canadian economic data and the likely avoidance of tariffs. Just as the tariffs on 1 February were postponed to March, we expect further delays, allowing Canada to effectively avoid US tariffs while renegotiating the United States-Mexico-Canada Agreement (USMCA) free trade agreement.

Although USMCA is scheduled for review in July 2026, we anticipate this timeline being moved forward. Until the agreement is renegotiated or its terms become clearer, continued threats of tariffs may weigh on Canadian investment spending and increase the Canadian dollar volatility. Therefore, we maintain a cautious outlook for the currency in the near term. Later this year, we expect USD/CAD to fall back into the high 1.30s as clarity on tariffs and USMCA emerges, and we begin to see greater growth benefits from the Bank of Canada's aggressive rate cuts as well as a moderation in US growth and yields.

Euro (EUR)

Our tactical outlook for the euro worsened in January. While household balance sheets are strong, unemployment is low, and the uptick in purchasing managers indexes (PMIs) is encouraging, several negative factors currently outweigh these positives. Growth remains stagnant, and long-term potential growth is anemic. Trump has clearly signaled his intent to add further pressure through tariffs. There is also no indication of political progress toward much-needed economic reforms, and the ECB remains on track for a sub-2% policy rate in 2025. We expect the euro to easily test parity against the US dollar, and it could fall towards 0.95 depending on the severity of US tariffs.

In addition to near-term downside risks, our long-term fair value model suggests the euro is overvalued compared to most of the G10 currencies, except for the US dollar and Swiss franc.

British Pound (GBP)

We remain bearish on the pound over both the short and medium terms. The UK economy has stagnated over the past six months, with all three of our summary economic indicators turning negative on the currency. While the October budget was modestly expansionary over the medium term, near-term increases in the National Insurance payroll tax are likely to further soften labor markets and household demand. Additionally, the increased issuance of government debt to fund the budget, in combination with high yields, is likely to keep investors wary of fiscal risks, as we saw in January. Given this context we expect the BoE to adopt a more dovish stance than currently expected over 2025. Therefore, we are negative on the pound. (Note: we do not believe that the UK faces substantive risk of direct US tariffs due to the US bilateral trade surplus with the UK.)

Our long-term valuation model offers a more positive pound outlook as the currency screens as cheap to fair value. But we expect sticky inflation and the chronically weak potential growth post-Brexit to likely weigh on fair value, somewhat limiting that potential pound upside over the next several years.

Japanese Yen (JPY)

Our model shifted negative on the yen over the tactical horizon due to strength in commodity markets, which favors higher-beta currencies of commodity exporters. However, we urge caution in overinterpreting the importance of commodity models in the current rates- and policy-driven environment and see greater upside risks for the yen.

The threat of US tariffs and broad weakness in G10 (excluding the US and China) growth suggests that the recent uptick in commodity prices is not based on broad global economic strength. Japanese growth expectations have softened, but the inflation and wage outlooks remain solid, supporting at least one more rate hike this year. At the same time, we see downside risks to the US Federal Reserve (Fed) and G10 average rate outlooks as economies soften. If our expectations hold, this should shift carry in favor of the yen, clearing the way for significant appreciation over 2025.

We continue to favor expressing this view through the long yen versus the Swiss franc in the short term, given the still-high US yields and the patient Fed. Short euro and pound versus yen positions also look attractive, though with a negative drag from carry.

Swiss Franc (CHF)

We remain negative on the franc over the tactical and strategic horizons. The Swiss franc is the most expensive G10 currency per our estimates of long run fair value and has the lowest yields and core inflation in the G10. All this while the real trade weighted franc is in the upper half of its 30-year range and the SNB is cutting rates. We expect the SNB to become more amenable to direct currency market intervention to weaken the franc once the policy rate gets below its current level at 0.50.

Given that much of the inflation undershoot is tied to franc strength through import prices, it would make sense for the SNB to shift focus from rate cuts to a weaker currency policy.

To make matters worse, President Trump has explicitly stated he is considering tariffs on the pharmaceutical sector, a key Swiss export industry. Overall, we expect the franc to transition into a prolonged reversion toward our estimate of its long-term fair value.

Norwegian Krone (NOK)

Our tactical view turned positive for the krone in January due to resilient oil prices and stronger local equity performance. While upcoming monetary easing will reduce yield support, krone is likely to retain yields above the G10 average, and its growth outlook remains modestly positive—clearly better than regional peers such as the EU and the UK. Longer-term forces also favor the currency. The krone is historically undervalued relative to our estimates of fair value, and it is supported by steady long-term growth potential and a strong national balance sheet.

However, we recognize that there are material short-term risks. Oil prices have trended lower since mid-January, and the krone has shown sensitivity to global risk sentiment, which is likely to remain volatile given high equity valuations, economic challenges across much of the G10, and uncertainty around US policy.

Swedish Krona (SEK)

We shift to a modest negative on the krona over the short run. While we were pleased to see Q4 gross domestic product (GDP) return to positive territory at 0.2%, it was below expectations of 0.3%. This is similar to the PMI data early in the month: it points to growth (reading above 50) but is soft relative to expectations.

The slower-than-expected pace of economic recovery following three quarters of negative growth, the relatively low yields, and spillover risks from lackluster EU growth and potential US tariffs are all likely to weigh on the krona. We do expect the krona to outperform the euro, pound and franc, but underperform the broader G10 average.

In the long term, we are more constructive. The currency is very cheap to long run fair value and cyclically depressed, once growth begins to turn higher, tariff risks are resolved (or fully priced), and global yields move lower as the Fed and other central banks continue to ease policy, the krona has ample room to recover.

Australian Dollar (AUD)

We see Australian dollar struggling against the US dollar in the near term due to solid US growth, high yields, and tariff risks. However, we shift to a more positive view of the Australian dollar against the G10 currencies, particularly the euro, pound sterling, and Swiss franc. While the odds of an RBA rate cut are high, the market appears overly confident in this view. The labor market remains strong, household consumption has materially improved, fiscal policy is supportive, and YoY core inflation is still slightly above the upper end of the target band at 3.2% versus the 3% target. Therefore, it is difficult to justify a significant dovish shift in monetary policy. At the very least, we believe the RBA may deliver a rate cut with a hawkish tone or might refrain from cutting rates altogether.

In addition, Australia’s exposure to US tariff risks is moderate. Direct exports to the US are minimal, and the knock-on impact from reduced Chinese demand may be muted if China responds to tariffs with fiscal stimulus, which could, in turn, boost demand for Australian exports like iron ore.

In the long term, the outlook for the Australian dollar is mixed. It is undervalued relative to the US dollar, British pound, euro, and Swiss franc, offering room for appreciation, but it is expensive compared to the yen and Scandinavian currencies.

New Zealand Dollar (NZD)

We shifted from negative to neutral on the New Zealand dollar. The benefit of New Zealand's high yield has diminished as the Reserve Bank of New Zealand (RBNZ) continues to ease policy in response to strong disinflation and recessionary conditions. Ongoing challenges to growth and the weak external balance, with the current account at -6.7% of GDP, are likely to keep the New Zealand dollar under pressure.

On a positive note, the significant selloff in the New Zealand dollar over the past 3.5 months (-9.8% against the US dollar) already reflects a discount for lower growth and yields. Additionally, the recent pickup in commodity prices and the less severe-than-expected Chinese tariffs should provide some relief, which leaves us neutral in the short term.

In the long term, our outlook is mixed. Our estimates of long-run fair value suggest that the New Zealand dollar is undervalued relative to the US dollar and Swiss franc, with ample room for appreciation, but it is overvalued against the yen and Scandinavian currencies.