Global stocks and bonds are under pressure, but the standout move is a sharp sell-off in US assets, with the dollar extending losses triggered by Trump’s renewed tariff and Greenland threats ahead of Davos. Core European currencies are outperforming, led by a 1% jump in the Swiss franc, while rising gold prices and FX volatility signal growing investor expectations of further USD weakness and a potential DXY retest of the 97.75–98.00 area, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

US assets lead decline as USD slides sharply

"It feels like a 'sell (almost) everything' morning as global stocks and bonds decline. The real story is the broad decline in US assets, however, with the USD sliding sharply in an extension of the weakness seen Monday in response to President Trump’s Greenland/tariff threats. Just ahead of Davos, where the president speaks tomorrow, he has also chosen to pick fights with some European counterparts which may or may not be related to the apparently faltering support for his Gaza 'Board of Peace'."

"Core European currencies are outperforming and the CHF continues to lead gains with a 1% rise on the day. The EUR is nearly a cent higher from yesterday’s close while EM FX is lagging somewhat. Crude oil is marginally firmer but gold continues to rise strongly (+1.4% to a new high), reflecting investor preference for a non-dollar haven which, at the margin, adds to broader dollar headwinds. FX volatility is firmer and risk reversals are repricing in favor of more USD weakness in a sign that investors are anticipating further USD losses."

"Positioning data is showing some softening in overall exposure to the USD but this is perhaps best characterized as leaving investors in aggregate now just overweight USD relative to benchmarks, down from very overweight late last year. That leaves the door open to some further weakness in the USD in the coming months, especially if investors opt to rebalance portfolios away from US assets in response to belligerent US policies. Hefty DXY losses so far today reaffirm resistance in the low/mid-99 zone for the index and point to a retest of the late 2025 lows around 97.75/00 in the short run."