The euro surged alongside traditional safe haven currencies on Monday as global investors fled riskier assets in response to a fresh wave of US tariffs announced by former President Donald Trump, fuelling fears of a looming global recession.
Market sentiment soured sharply at the start of the week, with Asian equities sinking and futures on Wall Street pointing steeply downwards. Amid the uncertainty, traders bet on a faster-than-expected interest rate cut from the Federal Reserve, potentially as early as May, as economic headwinds gather pace.
The US dollar, typically a safe harbour in times of crisis, faltered against the yen and Swiss franc, highlighting growing investor unease about America’s economic prospects under renewed trade pressure. The greenback dropped 0.75 per cent against the yen to ¥145.79, extending a 2 per cent slide from the previous week. At one point in the session, it had fallen over 1.4 per cent.
“The big theme has been selling USD/JPY because it’s a good US recession proxy and a good US yields proxy — and US yields tanked,” noted Brent Donnelly, president of Spectra Markets.
The dollar also fell to a six-month low versus the Swiss franc, down 1.15 per cent to CHF 0.8505. Both the yen and franc benefitted as investors scrambled for safety, with gold and government bonds also catching strong bids amid the rout.
Euro edges up amidst market turmoil
Amid the global flight from risk, the euro rose 0.5 per cent to $1.1018, flirting with six-month highs. Its resilience surprised some analysts given the eurozone’s own vulnerability to trade tensions, but a combination of investor rotation out of US assets and the euro area’s healthy current account balance lent support.
“The euro has certainly performed really quite well over the last couple of days since we’ve heard about the tariffs,” said Jane Foley, Head of FX Strategy at Rabobank.
“Maybe that’s related to the euro zone current account position, or maybe it’s just related to investors still moving out of US assets and still not quite sure where they should be moving their money to.”
In contrast, traditionally risk-sensitive currencies took a beating. The Australian dollar tumbled to a five-year low during early trading before recovering slightly to trade 0.4 per cent lower at $0.6023. The New Zealand dollar also dropped, last seen at $0.5586, down 0.18 per cent after earlier losses of over 1 per cent. The Swedish krona and Norwegian krone also slid as risk aversion swept markets.
Sterling held relatively steady at $1.2902, showing limited movement despite the broader currency upheaval.
Trump’s tariff shock and global fallout
The renewed tariffs, which target a broad swathe of global imports including European goods, have triggered a strong response from world leaders. The European Union is reportedly readying retaliatory measures on up to $28 billion worth of US products — from dental floss to diamonds — in a bid to present a united front against the protectionist onslaught.
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Meanwhile, China, already embroiled in a long-standing trade dispute with the US, reiterated its stance on Saturday, saying bluntly that “the market has spoken,” following its own countermeasures including 34 per cent tariffs on all American imports.
Trump, speaking to reporters on Sunday, downplayed the turmoil in the markets, stating that “sometimes medicine is needed to fix things,” denying that the intention was to provoke a selloff.
Rate cut bets accelerate
In response to the escalating trade war, traders now see increased chances of the Federal Reserve stepping in to support the US economy. Markets currently price in a 55 per cent probability of a rate cut in May, with futures indicating over 100 basis points of easing expected by the end of the year.
Fed Chair Jerome Powell, however, offered a note of caution last Friday, stating it was “still too soon to know” what the central bank’s appropriate response should be.
With global markets rattled and safe haven flows intensifying, investors and policymakers alike are bracing for what could become a turbulent second quarter in 2025.
