The European Stoxx future is down 1.3% and the S&P future is 0.9% lower as market participants respond to the announcement by President Trump of a 10% US import tariff being implemented against Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland, MUFG's FX analyst Derek Halpenny reports.

USD weakens amid rising trade tensions

"The tariff is effective 1st February and will rise to 25% on 1st June. The tariff will remain until a deal has been reached on the 'complete and total purchase of Greenland' by the US. Initially the currencies impacted by this announcement opened weaker but through the Asian trading session the view that there could be a return of the 'sell America' trade and the dollar has seen some renewed weakness. This tariff escalation needs to be viewed in the context of other developments, in particular the upcoming decision on the new Fed Chair and the possible imminent Supreme Court decision on the legality of using IEEPA to implement reciprocal tariffs globally."

"There is a plausible scenario in which those additional factors undermine the dollar as well and hence reinforce the view that global investors will either sell US assets or look to reduce US dollar exposures via increased hedging. Given the countries impacted are all European, it is not surprising that the Swiss franc is seeing the greatest outperformance on safe-haven flows. It remains the most reliable currency for safe-haven flows. Even the yen has strengthened today which may reflect in part the increased risk of intervention after last week’s rhetoric that signaled the potential for yen-selling intervention."

"What will likely contain the sell-off for the dollar (DXY just -0.3%) is the fact that this tariff is only effective 1st February and investors will be aware of the potential for Trump to back down on some form of 'deal' being done. However, that scenario becomes less likely if there is retaliation in Europe. The EU is considering imposing tariffs on EUR 93bn worth of goods if Trump follows through on the threat. This relates to a previous plan that was suspended and therefore could be activated quickly. President Macron wants to go further with the EU’s anti-coercion instrument, giving the EU scope to act beyond trade tariffs."