The US Dollar (USD) has softened as investors anticipate that tariffs tied to President Trump’s Greenland plans may be delayed or cancelled, easing immediate trade tensions. With government-mandated selling unlikely, markets are seeing moderate USD outflows driven by private-sector hedging, echoing patterns seen after last year’s post-Liberation Day volatility, MUFG's FX analyst Derek Halpenny reports.

Market bets on delay or reversal of US tariffs

"The dollar selling yesterday and into today points to global investors making the assumption that the planned tariff action related to President Trump’s wish to purchase Greenland will either be revoked before the effective date of 1st Feb or possibly that date will be pushed back in order to allow for discussions to take place between the US and Europe. That seems more plausible given it is highly unlikely to be resolved within two weeks and it is also highly unlikely that Trump would back down. The UK media is reporting that a call between Trump and Starmer on Sunday had helped convey the fact to Trump that he had misunderstood the reason the military personnel had gone to Greenland – could this help provide justification for cancelling the tariffs?"

"The intentional selling as a form of retaliation seems very implausible. Governments can hardly force private-sector investors to sell. A look at Treasury holdings data does indicate significant holdings by European investors – the UK USD 800bn; Belgium USD 399bn; Luxembourg USD 328bn; Switzerland USD 243bn; Norway USD 218bn are the largest. But many of these countries (UK for example) are used as intermediaries with the ultimate owner not from that country so the true holdings are much lower. Ireland owns USD 238bn but many US tech companies are the ultimate owners."

"The most plausible scenario we see if turmoil related to Trump’s trade policies and other policies escalates further is a repetition, probably to a lesser degree, of what happened post-Liberation Day last year when heavy selling was more a reflection of increased appetite to hedge US dollar exposures. Flow data from that period showed moderate selling of US assets (in April) followed by record buying with investors seen as more interested in increasing hedge ratios. We think there is more of that to come. Certainly Japanese investors have scope to increase hedge ratios while dollar hoarding in China could diminish on increased expectations of further dollar weakness. The trade uncertainty, Fed independence threats, and Trump’s approach to geopolitics generally are all factors that could result in a sudden pick up in appetite for reducing US dollar exposures. The cost involved in that should also cheapen if we see the Fed deliver further rate cuts this year."