Foreign Exchange Commentary

Summary

• The U.S. dollar index (DXY) is trading near 97.75 after the Trump Administration walked back its tariff threats on various NATO countries for stationing troops in Greenland, the territory they’d like to annex
• Though briefly recovering to 98, the DXY dropped 0.5% on Friday due continued policy volatility
• As part of the negotiations, the U.S. military is seeking to gain unprecedented, open access to Greenland as well as U.S. rights to various mineral deposits, and European participation in Trump’s “Golden Dome” Missile project
• The euro is trading near yearly highs but also remains volatile as traders balance geopolitical violence and positive economic data
• The Japanese yen remains weak due to policy uncertainty amid Sanae Takaichi’s call for Japanese Lower House’s snap elections 
• The Australian dollar continues to rally against the US dollar
• Gold prices continue to uptick and could be on pace to hit the key $5,000 mark per troy ounce

Big Picture: U.S. dollar rallies through the New Year

The U.S. dollar Index (DXY), which measures the U.S dollar to a basket of other currencies, dropped sharply this past week, down 1.4% amid uncertainty about recent U.S. policy rhetoric. While there was a brief rebound after President Donald Trump had walked back his tariff threats on various European countries that had stationed troops in Greenland, the territory he desired, to show solidarity with Denmark. Friday’s session saw the U.S. dollar drop an additional 0.5% as markets remained bearish on the U.S. dollar amongst increased rate-cut expectations from a yet-to-be announced Federal Reserve Chairman who could be sympathetic to the Trump Administration’s demands.

The semi-autonomous island of Greenland, which is home to roughly 60,000 residents has been subject to great contention in the international sphere of influence over the last few weeks. For President Trump, Greenland represents an enormous strategic advantage for the monitoring of the artic circle. Additionally, Greenland’s vast rare-earth mineral deposits and oil reserves present commercial mining opportunities that the Trump administration is actively sourcing in other parts of the world such as Venezuela.

While the U.S. military already has unrestricted military access, the Trump administration’s views owning Greenland outright would present a more psychological barrier to bad-faith non-NATO countries dealing with the U.S. 

On Saturday, January 17^th, President Trump announced 10% tariffs on all goods sent to the U.S. from Denmark, Norway, Sweden, France, Germany, the U.K., Holland and Finland if these countries did not support his plans starting February 1^stafter these countries stationed troops in Greenland. Additionally, he announced 25% tariffs by June 1^st if no deal was put in place. 

This drew staunch criticism from NATO allies, with Denmark prime Minister Matte Frederiksen warning her EU neighbors that Trump’s language was “undermine(ing) transatlantic relations”. EU Chief Ursula Von Der Leyen in a separate speech announced the EU’s response would be “unflinching, united, and proportional.” This immediately prompted the “sell-America” trade and caused rallies in Gold, Silver, and other commodities while the 10-year Treasury Bond opened the holiday-shortened week almost thirteen basis points higher in yield (which lowered the price.) Additionally, the EU suspended its trade agreement with the Trump administration and discussed deploying its anti-coercion tool that would’ve deployed counter-tariffs on some $100 billion dollars’ worth of goods on items ranging from bourbon and soybeans to plane components and other technology.

However, by Wednesday, the trade had reversed; During his speech in Davos, Switzerland at the World Economic Forum, President Trump opened with a vow to not use force and walked back his Tariff threats after announcing ‘frameworks of a deal following his conversation with NATO secretary Mark Rutte. While it’s still unclear what exactly the deal is comprised of, reports suggest mineral rights may be awarded to the U.S. alongside participation in Trump’s “Golden Dome” missile project: his multi-layered defense system project containing space-based interceptors and other advanced technology sensors aimed at protecting the U.S. against various missile threats including hypersonic, ballistic, and cruise missiles. 

Though tensions have simmered, the euro, currently trading at yearly highs remains volatile, as geopolitical uncertainties remain elevated. In addition to the Greenland threats from the U.S., Europe remains entrenched in the Russia-Ukraine conflict which in recent days has seen Russian airstrikes cut power to millions of residents in Kyiv and breaches in its nuclear-powered energy substations. Fundamentally, the euro remains in a solid place with euro-zone inflation coming in at 0.2% month-over-month, in-line with expectations. For now, the European Central Bank will likely keep interest rates neutral for the foreseeable future.

Despite the USD sell-off, The Japanese yen remains weak, struggling after Japanese Prime Minister Sanae Takaichi called for snap elections less than 6 months into her term. By dissolving the Japanese Lower House, Takaichi is gambling her own seat as Prime Minister to bolster her coalition of the Liberal Democratic Party. Though it only holds approval ratings of 29%, Takaichi herself is enjoying an approval rating of 75% according to the Nikkei. Though her popularity is primarily related to her personal appeal as a self-made, working-class women who holds Japanese social values closely, there are lingering debates over the future fiscal position of Japan- which continues to be plagued by stagnant growth and high inflation. The Bank of Japan raised rates to 0.75%, which was the highest rate in 30-years and is considering further hikes in the future. 

The Snap election will allow Takaichi and her party a chance to take a more significant majority within the Lower House where they currently hold a 1-vote majority, thanks to their partnership with the Japanese Innovation party and a few independents though experts warn that her individual support may not directly translate to gains for the LDP.

The Australian dollar, has seen a positive start to the year, rallying nearly 3% against the U.S. dollar and currently enjoying 4-straight days of positive gains. With unemployment falling to a 7-month low of 4.1% and an accelerating economy, there are discussions of a rate-cut from the Australian Reserve bank who is set to meet February 3^rd. As the Trump Administration narrows its pick for the new Federal Reserve Chair and ruled out original favorite Kevin Hassett, the tide has shifted towards a more accommodative Chairman, sympathetic to the Trump Administration’s goals of lower interest rates. This could result in the U.S. dollar declining further against the Aussie dollar which could see an additional hike later this year.