Tariff & Tumble: Currency Markets in a Spin

In this episode, we break down how tariffs, rate fears, and global politics are sending currency markets spinning. Tune in as we explore what traders are watching — and where the dollar might go next.

Summary – IBKR Podcasts Ep. 245

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

In today’s podcast, I’d like to welcome Steve Hatzakis, Global Director of Online Research at forexbrokers.com. How are you, Steve? 

Steven Hatzakis 

I’m well. Thank you, Andrew. Thanks so much for having me again. 

Andrew Wilkinson 

It’s great to have you back on the show again. We’re going to discuss recent political and economic events and their impact on the global currency market in today’s episode. 

Risk markets, pretty much wherever you look, took a swan dive starting in late February, and most of the popular so-called Trump trades have been tossed out the window. And the president told us to expect some pain in order to achieve his policy objectives. Steve, the dollar didn’t avoid the fallout now, did it? 

Steven Hatzakis 

That’s a great point. The dollar did weaken against certain currencies, while it was pretty much range-bound against certain others. But in the grand scheme of things, if you look at the dollar over the past couple of years, it’s strengthened significantly against so many currencies, including the euro. 

Back in 2022, we were below parity for a moment in the euro. And if we think back to 2008 or so, when the euro was at 1.51–1.60, the dollar has come a long way since then to strengthen. So the fact that we’re—you know, the dollar is weakening a little bit against the euro over the past two weeks—I think it’s normal in the grand scheme of things. 

Yes, the market did react very strongly to the tariffs, and that’s why we’ve seen increased volatility. The market doesn’t know which way to go with this because there’s news coming out one way and then changing in the other direction with the tit-for-tat and the counter tariffs that are coming into place. So the dollar is holding its own, but it has weakened a bit. 

Andrew Wilkinson 

Give us a sense of that magnitude of the weakening of the dollar. 

Steven Hatzakis 

We’re looking at around 7,800 pips roughly on the EUR/USD over the past two weeks. But it’s very decisive. So it was day after day of weakening. And that’s why if you look on a weekly candle, you’ll see that the size of that candle is pretty significant. And historically, whenever you see really large weekly candles like that, they’re typically preceded—or subsequently you’ll see large candles following. 

So I don’t think the volatility is gone. I think it’s here to stay for at least a few weeks, maybe even longer. But at the same time, the dollar has held its own against other currencies. If you look at the top 10 countries where the U.S. has the largest trade deficit—some of the largest trading partners—the dollar has pretty much remained range-bound against many of them, including the Mexican peso, the Vietnamese dong. Again, Europe, in terms of Ireland and Germany being two major trading partners—there has been that weakness that I mentioned. 

But in the grand scheme of things, personally, I think the dollar could weaken a lot more. So I don’t think it’s over just yet. And yeah, this could very well be the beginning of a longer-term trend that’s playing out. 

Andrew Wilkinson 

What is the official or unofficial policy stance in Washington regarding the dollar? I remember back from, I think, 1985, the Plaza Accord—the dollar has always been referred to as “America has a strong dollar policy,” but it’s not really cast in stone. What are your thoughts? 

Steven Hatzakis 

I think recently maybe that hasn’t been the main focus because, sure, the dollar has been a flight to quality over the years. Central banks around the world have held dollars, and it’s always been thought of as very strong. It still is one of the strongest currencies. It’s on 88 percent of every foreign exchange currency pair trade. 

So although it’s dominant, there are periods where it goes through weakness. And right now, we saw a big flight to gold reaching all-time highs over the past week or so near the 3,000 mark. So a lot of other assets had pulled back, but gold was, I think, sought after more as a safe haven, given the uncertainty with the tariffs and the back and forth. 

I think that’s why the dollar wasn’t as much of a safe haven bet as it usually is. And so I’m not sure what the stance is from Washington because I think their main focus with the current administration is to get the economy to overcome inflation—to grow, to get prices in check, to reduce the deficit, to increase the GDP, get that ratio in order—because the debt-to-GDP ratio is around 125 percent. 

The U.S. economy is producing around 29 trillion, whereas the deficit is around 36 trillion as far as the debt. Those two numbers aren’t too far off. And I think Trump’s trying to get the debt down relative to GDP, get GDP higher. 

Could we go through a recession before we get there? I think it’s very possible. It may be even necessary. 

Andrew Wilkinson 

So you mentioned that people have not seemingly bought dollars as a safe haven play. Why do you think that is in this particular event as we go through these negotiations? 

Steven Hatzakis 

Sure. We’ve seen in Germany their commitment to spending nearly a half a trillion—which, that alone, from a quantitative easing perspective, is going to inject a lot of liquidity in the market. And while that should weaken the euro over the longer term, in the short term, it could have that stimulus effect, just like we saw in the U.S. with the pandemic when we were printing trillions of dollars. That really strengthened the dollar in the short term. 

But long term, it adds to things like the debt that the country has from a sovereign perspective. So yeah, I think from a short-term perspective, everybody was trying to diversify across other assets, whether it’s the euro, the pound, the Swiss franc, the yen. 

But again, the dollar has only weakened against a handful of currencies, albeit very sharply and quickly within the past week or two, but it’s still very strong from a longer-term perspective. 

But I do think that we will continue to see dollar weakness until the tariffs kick in, until the economy is restructured, because that’s essentially what’s happening right now with the current administration. There’s a lot of major swift changes happening that are really trying to restructure the global trade. 

Andrew Wilkinson 

Steve, when you were last on the program, you talked about how yields matter—and really the yield differential matters—when it comes to being one of the driving forces of any currency relationship with another. You just mentioned the defense spending in the U.S. There’s been a big ramp-up in 10-year German government bund yields widening out in favor of the euro currency. That’s one of the big reasons behind the recent strength of the euro. And given the financial dislocation that we’re seeing here in the U.S. markets — I think it’s fair to say that the U.S. economy could weaken. How are traders currently tackling the forex market? And is there an obvious path of least resistance that you can see? 

Steven Hatzakis 

That’s a great point. And really, the interest rates are what drive the FX markets the most when it comes to monetary policy and how they affect yields — short-term, long-term — because institutions are moving around billions of dollars daily and shifting their allocations in ways that will continue to affect the interest rates, and the exchange rates as a result of those interest rate changes. 

So things like the carry trade will shift. And historically, rates have been low across the world. But now, as they’re starting to rise and inflation is a concern, that’s really the biggest problem. Because typically, when you cut interest rates to boost an economy, yes, the dollar could weaken from that. 

But at the same time, if inflation is outpacing the effect that the rate cut has, then you might not necessarily get those benefits. And I think that’s what’s happening now. It’s not that we’re just changing one variable, like rates, to try to get an outcome — we’re changing many variables at the same time. 

And so there’s some sort of arbitrage that’s happening as the market’s trying to rebalance itself. And that’s showing up in things like the German yield curve. 

Andrew Wilkinson 

I think we all agree that things are moving very quickly, and they’re getting reversed even faster. What tools do you feel are best for staying on top of the forex market — especially as things are unraveling second by second in some cases? 

Steven Hatzakis 

I think the classical tools like technical analysis and charting have always been a big part of the arsenal — along with the economic calendars that traders will look at to see what news is coming out this week, what’s on the horizon across different countries, what are the forecasts there? Is it above expectation, below? 

So subscribing to those calendar events and paying attention to those economic announcements has always been important — the focus for traders — because the fundamental news has an impact in the market. Even if you just look at charts all day and technical analysis, if news comes out and it makes the market move significantly, that can affect you as a trader. 

So I think that hasn’t changed. However, with the whole trade war going on — and the tariffs and the back and forth and the unexpected announcements that are happening — it’s an ongoing calendar event that has no expiration date, that nobody knows when the next news is going to come out regarding that. 

So I think while there is a little bit of tariff fatigue that’s in the market now because we’ve already seen the overreaction — and now the market’s just waiting for it to settle in terms of, okay, what are the final tariffs going to be once everyone’s back with the counter offers, and how will the market accept that? How will it adapt to that? 

So right now, there’s been a lot of sort of tactics and negotiations, and it’s normal, I think, if you’re going to expect such massive restructuring going on. It’s normal to see those knee-jerk reactions and negotiations. 

And I think once that settles, the market will start to digest it more and have more of a decisive direction. But at the same time, it’s going to cause major changes to the underlying supply chains. And that could, on one hand, put a lot of companies out of business — so it could be recessionary from that perspective — but on the other hand, it could really help other companies become more resilient. 

And how do they react to that? How do they diversify their supply chains or change them or improve them or adjust their margins, etc., to help emerge into this new economy that we hope to create moving forward? 

So I think it reminds me a little bit of the pandemic. Back during COVID, all those local businesses that went out of business because they couldn’t adapt — but then you had other restaurants or whatnot that got more electronic, more efficient, they started using QR codes, etc. They adapted to that. And as a result, it made them stronger. They came out of that a lot more resilient. 

So I think we might see something similar happen for companies — that maybe they’re too dependent on certain supply chains — they could be at risk. But on the other hand, it’s an opportunity for growth for others. So I think it’s going to take time, but it’s going to be at least a multi-year process. 

Andrew Wilkinson 

Do you think that there’s a risk of financial isolation for the U.S., in which the likes of Europe and Canada take a hardball stance against Trump’s negotiating tactics? 

Steven Hatzakis 

From a trade perspective, again, we have major deep economic ties with a lot of these countries. And Canada — we have, I think, the ninth-largest deficit with them — $63 billion. That’s goods alone, according to some census data last year. 

And I think that when you have such deep ties, trading such large amounts of goods, it’s not easy to just switch to someone else or to abruptly end trade. But it will trickle down and cause micro changes at the farmer level or the manufacturing level in each country. 

I think there’s still a ton of dependence on the U.S. Could that shift a little bit? Could that change a little bit? Sure, maybe. But I don’t think it’s going to isolate the U.S. that much. 

The U.S. has always had a very dominant position and is the number one importer, right? So I don’t think that’s really going to change too much. But we certainly will see the changes reflect in the exchange rates, in the interest rates, and in the prices of financial assets until that restructuring is finished — basically in terms of finalizing all the tariffs and having everybody in agreement, and then seeing how that’s going to affect economic output in the coming years. 

Andrew Wilkinson 

What do you think is the outlook for interest rates? We’ve got an FOMC meeting coming up shortly. They’ve got the chance — inflation is coming down, it’s still very sticky and above target — but as we head towards the summer, if they don’t act now, is there any chance of an emergency cut in interest rates from the Fed? 

Steven Hatzakis 

It’s interesting. Yeah, I think they could pull a tactic like an emergency measure. But whether it’s a cut or a hike, I really don’t know because the CPI numbers were more favorable last month, right? That just came out. 

So the inflation improving — in terms of it going lower — I think is a positive sign. And so they have to take into consideration the inflationary behavior of the economy with that rate cut, and not make it just solely based on economic growth prospects. 

But at the same time, if the economy is heading towards a recession and they want a more soft landing, would they do a small cut? Possibly. That theoretically should weaken the dollar. 

But given inflation, and given other factors, and given tariffs, and all the other variables that are changing, it could have the opposite effect. So it will be interesting to see how that meeting turns out later this month because there could be some emergency actions — given the market — I don’t want to say turmoil, but it’s been a bit… from a longer-term perspective, even the drop in the stock market hasn’t been as pronounced as some prior drops in the past year or two, but it is one of the bigger, faster drops. 

But this could still just be halfway, right? It could go a lot lower. And so, by the time that meeting happens, there could be some emergency measures — such as a cut. 

Andrew Wilkinson 

Let’s turn our attention for the last question here to cryptocurrencies. 

Bitcoin’s been up to, what, 110,000 after the inauguration — on a positive adoption approach by Trump and the U.S. government. Why are cryptocurrencies falling so heavily in sympathy with other risk assets at this point? 

Steven Hatzakis 

That is the million-dollar question. I think it’s interesting because Bitcoin and cryptocurrencies are some of the most volatile assets in the world. They’re some of the most complex financial products that have ever been created. 

And while I believe strongly in cryptography and blockchain technology and the prospects for Bitcoin, I believe that the risk is proportional to the potential reward. So it’s precisely the most risky asset that you would feel the least comfortable holding — that could potentially give you the biggest return as well. 

So maybe there was already enough of that appetite in the market, and people wanted to maybe shave back their positions a little bit or move into some other assets where they felt more certainty — because it is a highly uncertain asset. 

And then suddenly we had all of this market uncertainty with the tariffs and everything else. So I think it’s normal. If you look at Bitcoin’s history, there’s been significant drops like that that have happened dozens of times since back when it was trading at 10 — and all the pullbacks it’s had since then. 

So I don’t think it’s out of the ordinary for its behavior. Even during the pandemic, it fell significantly. 

And I think gold is more really of the short-term safe haven — at least — even though the upside might not be as high as assets like Bitcoin that are potentially more volatile. I think really it was just the uncertainty of the markets that might have caused investors to sell off those assets. 

Andrew Wilkinson 

Very good. We’ll leave it there. Steve Hatzakis from forexbrokers.com — thank you very much for joining me today. 

Steven Hatzakis 

Thank you, Andrew. Always a pleasure. 

Andrew Wilkinson 

And to the audience — thank you also for listening and getting to the end of today’s podcast. And remember to subscribe wherever you download your podcasts from.