Chi Lo, Senior Market Strategist for Asia-Pacific at BNP Paribas Asset Management, echoed similar concerns, emphasising that tariffs inherently support a stronger dollar.
Countries affected by US tariffs may allow their currencies to depreciate as a countermeasure, reinforcing the trend of a robust dollar in the short term. The long-term impact will depend on how trade negotiations unfold and whether major economies like China and Europe face significant tariff impositions.
These are the edited excerpts of the interview.
Q: Should we understand this as less than we feared? After all, the President has stayed back from going ahead with that 25% on Mexico and Canada, it looks more like bark than bite, and China, which we were told 60% is only 10%, so do you think we need to fear the tariff war less than we thought before February 1?
Kuijs: I don’t think so. The President of the United States has two reasons to talk about and threaten with tariffs and to impose them. One is economic, and the White House has laid out already a pretty comprehensive agenda. They will go over all their economic relations with China, Europe, and other countries that will come in due time, and when will we get tariff imposition because of that. The other is, these non-economic factors, like fentanyl, immigration, these kind of things.
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So what we have seen now, the threats to Canada and Mexico are related to these non-economic factors that they have been taken off temporarily, the ones in China are not the ones that we have had so far are not the only ones. There are also going to be additional tariffs being imposed for those economic reasons. So I would caution against being optimistic about what we have seen so far.
Q: How would you look at the impact on currencies? We saw the initial depreciation in currencies. The rupee took a pasting. But is the worst behind us in terms of the reaction of currencies, or have we just begun?
Lo: At this point, it is too early to call for the bottom or any change in trends of the currencies. Now the tariffs, by default, by itself, is dollar positive, because with tariffs imposed by the US on other countries, one of the easy ways for the other countries to fight tariffs is to have their currency depreciate. So that trend, other things being equal, still intact.
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We are still looking at a strong dollar, at least in the short term, against the other currencies. Going forward, it all depends on how the tariff implementation, and the negotiation will play out. Now, if we do see a very serious tariff impact, big tariffs imposed by the US on major economies like China, Europe and other big ones, we will likely see the dollar continue to go up, but then if negotiation brings down the tariff impact, then we may not see that much depreciation and so on.
Q: Would you agree that we still have to see a lot of strength? The worst is yet to come in terms of positive for the dollar strength.
Kuijs: I think what we saw in recent days was right, that whenever tariffs look likely to be imposed, that strengthens the dollar and, so when that reverses, we see some relief for other currencies. But we are not at all out of the woods in terms of that tariff action to come.
For the full interview, watch the accompanying video
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