The US dollar made significant gains yesterday, partly due to a report from CNN suggesting that Donald Trump might impose massive tariffs on his first day in office as President.
Will Trump Declare a National Economic Emergency on Day One?
The dollar’s strong performance continued with sharp gains across the board, leading to notable weakness in other currencies. The EUR/USD pair dropped below the 1.0300 level, and GBP/USD fell significantly below 1.2400, with the pound facing additional pressure. USD/JPY reached minor local highs but failed to maintain them as US Treasury yields retreated from new peaks.
Speculation continues about how the dollar might perform against the Chinese yuan if the People’s Bank of China (PBOC) were not actively intervening to prevent the USD/CNH pair from breaching the double top level of 7.375, established in 2022 and 2023. If this level is broken, markets could see significant volatility.
One likely driver of the market’s movement was a CNN article suggesting that Trump is considering declaring a national economic emergency on his first day in office. This move would aim to justify the introduction of universal tariffs targeting both allies and countries with differing international interests.
According to CNN, this information comes from four independent sources. Declaring a national emergency would allow the president to leverage the International Emergency Economic Powers Act (IEEPA), granting him the authority to take such measures during a national emergency of critical importance.
This report contrasts with a Monday article from The Washington Post, which suggested that Trump might pursue a more targeted approach to tariffs rather than a global one. Whether the CNN article will prompt a direct response from Trump remains uncertain.
Given the President-elect’s penchant for building suspense and signaling a willingness to take bold actions, it seems unlikely he will directly address the report. However, Trump’s actual trade policy remains unclear and could ultimately combine elements of both broad and targeted approaches. One possible scenario might involve starting with lower tariffs than markets fear, escalating them over time to pressure targeted countries into changing their behavior. Nothing is certain until Trump signs the relevant documents.
US Dollar Strength and Market Impact
The dollar continued to strengthen against all major currencies on Tuesday, supported by rising US Treasury yields following the release of the ISM Services Prices Paid Index for December. The index posted a robust 64.4, well above expectations of 57.5. This data likely contributed to the acceleration in dollar gains amid reports of Trump’s potential tariff announcement.
The pound came under additional pressure as rising global bond yields amplified the increase in UK gilts yields. This development may negatively impact the UK’s economic growth outlook. GBP/USD hit a new cycle low below 1.2350, just a day after breaching 1.2550 on speculation that Trump might adopt a softer stance on tariffs. Media-driven risk remains a key market factor at the moment.
The next significant support level for GBP/USD is the early 2024 low near 1.2300, followed by the psychologically important 1.2000 level, which has held since early 2023.
Yesterday’s market reaction underscores the sensitivity of market participants to policy announcements from the incoming Trump administration. This environment makes it challenging for investors to assess risk levels and maintain long-term positions. Consequently, responses to other data releases throughout the week may prove short-lived, even in the case of significant surprises.
US Treasury Yields and GBP Weakness
The US dollar started Tuesday’s session in a strong position, bolstered by December’s ISM Prices Paid Index at 64.4, compared to the expected 57.5. This spurred US Treasury yields to climb to new cyclical highs. Yields have continued their upward trend, exceeding 4.70% and approaching the psychological 5.0% barrier—a level last briefly touched at the end of 2023.
Meanwhile, the British pound remains under significant pressure as the UK grapples with stagflation. The pound saw sharp declines despite strong demand for a five-year gilt auction. Yields on these gilts rose to their highest levels since late 2023, surpassing 4.5%. This came just a day after 30-year gilt yields reached a 26-year high of over 5.21%, exceeding levels seen during the 2022 budget crisis under Liz Truss and marking the highest figures since 1998.
What’s more, UK gilt yields are rising faster than their global counterparts, reflecting fears that the UK is entering a stagflationary spiral—a serious threat to the pound. Rising yields will force the UK government to tighten fiscal discipline, likely slowing economic growth further. Borrowing costs exceeding 5% on the long end of the yield curve, combined with sub-1% real GDP growth over the past two years, create an exceptionally difficult scenario.
EUR/GBP Trends and Inflation Woes
In the EUR/GBP pair, there hasn’t been a significant reaction to the UK’s challenges, partly because the market has already priced in higher UK gilt yields and the Bank of England’s tighter policy. However, with higher-than-expected inflation readings in Germany this week and rising global yields, the pound has come under renewed pressure. EUR/GBP has climbed to multi-week highs above the key 0.8330 level, making it an important indicator for the pound’s further movement amid its weakness.
Author: John J. Hardy, Saxo Bank
