US Dollar Index Rose Above 109 During the Day, Non-US Currencies Weakened Collectively [SMM Analysis]

       According to a CNN report on January 8, Trump is considering declaring a "national economic emergency" in the US to provide legal grounds for imposing substantial tariffs on allies and competitors.

　　As a result, the US dollar index surged above 109 on the same day, while non-US currencies weakened collectively, and European and US stock markets experienced a sharp plunge in the short term.

　　Seeking Legal Grounds for Tariffs

　　During his campaign, Trump promised to raise tariffs on Chinese goods to 60% and impose a 10% tariff on goods from all other countries. After the election, Trump stated that he intended to impose an additional 25% tariff on goods from Mexico and Canada. In late December 2024, Trump threatened the EU, stating that if EU member states did not increase their purchases of US oil and natural gas to reduce the "massive" trade deficit with the US, he would impose tariffs on the EU.

　　To expedite the implementation of tariffs, Trump's team is considering declaring a "national economic emergency."

　　A national economic emergency declaration is a government action typically announced when the economy faces a significant crisis, aimed at mobilizing necessary resources and taking special measures to address the crisis. Such declarations may include a range of policy measures, such as fiscal stimulus, monetary easing, price controls, and trade restrictions, intended to stabilize markets, safeguard livelihoods, and promote economic recovery.

　　The US president has the authority to use the International Emergency Economic Powers Act (IEEPA) to formulate new tariff plans, which unilaterally authorizes the president to manage imports during a national emergency.

　　Reuters noted that Trump invoked the IEEPA in 2019, threatening to impose a 5% tariff on all imports from Mexico, claiming that if Mexico refused to take action to reduce the number of illegal immigrants crossing the US border, the tariff would rise to 25%. At that time, US and Mexican officials reached an agreement after a week of face-to-face negotiations, ultimately preventing the tariff from being implemented.

　　CNN also reported that Trump's advisors are evaluating the possibility of using Section 338 of US trade law. This provision allows the president to impose "new or additional tariffs" on countries deemed to discriminate against US businesses.

　　Additionally, Trump's team is considering using Section 301 of US trade law. During his first term, Trump invoked this provision to impose tariffs on China under the pretext of "national security."

　　However, the above two provisions would require investigations by the US Trade Representative's Office (USTR) or the US International Trade Commission (ITC). CNN noted that Section 338 of US trade law is typically used as a countermeasure and has not been tested in recent years. Section 301 requires government investigations before implementation, and companies affected by these changes often lobby for months seeking exemptions. Therefore, if Trump opts to declare a "national economic emergency," tariffs could take effect more quickly.

　　Trump's team has not yet made a final decision on whether to declare a "national economic emergency."

　　Canada's Energy Minister and potential prime ministerial candidate Jonathan Wilkinson stated on January 8 that Trump's claim that the US does not need anything from Canada is "completely false."

　　Wilkinson noted that it would be difficult for the US to find substitutes for Canadian crude oil, uranium, potash, and other critical minerals. He also warned that when it comes to potential Canadian trade retaliation, nothing is off the table, including export taxes. Wilkinson is scheduled to head to Washington next week and is arranging meetings with US lawmakers.

　　EU Industry Commissioner Thierry Breton recently stated that the EU must be prepared to counter protectionist trade measures taken by "other countries." His remarks largely alluded to the tariff threats Trump is expected to implement.

　　Financial Market Reactions

　　The latest developments related to Trump's tariff plans have consistently triggered volatile movements in capital markets and exchange rates.

　　On January 6, The Washington Post reported that Trump's team was exploring the possibility of narrowing the scope of tariffs, focusing on goods deemed critical to national or economic security rather than the comprehensive measures previously promised for the first day in office, causing the US dollar to plummet. Subsequently, Trump denied the report in a post on his social platform Truth Social, leading to a rebound in the US dollar.

　　Following the latest news on January 8, the US dollar index, which measures the dollar against six major currencies, rose 0.5% on the day, closing at 109.09 in the forex market.

　　A deputy director of the research department at a Shanghai private equity firm told the International Financial News that Trump's tariff policies typically strengthen the US dollar. On one hand, raising tariffs increases the cost of imported goods in the US, thereby boosting domestic inflation expectations. With rising inflation expectations, investors anticipate that the US Fed may adopt tighter monetary policies, such as raising interest rates, which enhances the dollar's appeal. On the other hand, Trump's tariff policies may provoke retaliatory tariffs from trading partners, escalating global trade tensions and prompting investors to seek safe-haven assets. As the world's primary reserve currency, the US dollar's safe-haven attributes are favoured.

　　Bloomberg and The Guardian noted that following news of Trump's new tariffs, US stock futures quickly declined, while European stock markets also broadly fell. The sell-off in UK bonds continued, pushing the yield on 10-year UK government bonds to 4.8% for the first time since 2008, and the British pound depreciated.

　　Since the US election, the euro has fallen more than 5% against the US dollar, marking the largest decline among major currencies. It briefly fell below the 1.03 level this week, hitting a nearly two-year low. Institutions such as JPMorgan and Rabobank estimate that due to tariff uncertainties, the euro could drop below $1 this year.

　　Brent Donnelly, president of Spectra Markets, stated that the euro's performance against the US dollar is strikingly similar to late 2016 and early 2017. At that time, the US dollar also surged at the end of 2016, as traders cheered Trump's unexpected victory and the potential of his "America First" agenda. However, as the administration's policy priorities became clearer and investors reacted to changes in White House staff and cabinet members, the dollar was subsequently sold off.

　　Donnelly noted that if Trump follows through on his previous threats to impose a 10% global tariff or a 25% tariff on goods from Canada and Mexico, the US dollar could strengthen as a result. Any further appreciation of the dollar may depend on whether Trump delivers on his aggressive trade protectionist promises.