Peter Smith
The US Dollar Index (DXY) trades higher, benefiting from short-covering ahead of the weekend. After the Japanese Yen (JPY) surged earlier in the week, profit-taking led to a reversal. As Scotiabank's Chief FX Strategist Shaun Osborne noted, the JPY became today’s biggest loser despite Japan’s January headline CPI rising to 4.0% Y/Y.
DXY Holds Firm as Market Volatility Declines
Core inflation in Japan increased slightly more than expected, yet investors are pulling back from JPY, reducing risk exposure before the weekend. The USD remains stable, though its potential for further gains remains uncertain. As Osborne highlights, "Just how far the USD can strengthen remains to be seen. My guess is not that far."
US Treasury Secretary Bessent remarked that markets tend to "live in the future," indicating that the USD's appreciation since the presidential election may already reflect some of the tariff risks priced into FX markets. However, uncertainty surrounding future tariff policies keeps investors cautious.
DXY Outlook: Tariff Uncertainty and Market Positioning
Markets remain optimistic about USD strength, as ongoing tariff discussions create potential tailwinds. While additional tariffs on China have already been implemented, delays in broader trade actions mean USD gains may be outpacing actual policy changes. According to Osborne, "It will be some weeks (perhaps early April, I think) until we get more clarity on how and where tariffs are going to hit."
In the meantime, broader FX market volatility has dropped significantly, with G7 FX vol retreating to around 8%, its lowest level since late summer. This environment suggests choppy, range-bound trading for the USD, with markets more inclined to fade rallies rather than push for aggressive moves.
Conclusion
While short-covering is temporarily boosting DXY, its long-term trajectory remains tied to developments in tariff policies and broader macroeconomic factors. Investors will closely monitor upcoming trade decisions, and a clearer picture is expected in the coming weeks. Until then, FX markets may remain subdued, with the USD facing limited but steady gains.
Peter Smith
