US Dollar Rallies Amid Fresh Tariffs: Citi Cautions Against Chasing Gains
The US dollar surged on Monday after President Donald Trump enforced new trade tariffs, pushing the Dollar Index (DXY) to a three-week high. The index rose 0.7% to 109.005 as of 08:25 ET (13:25 GMT), reflecting strong bullish momentum in the wake of escalating trade tensions.
Analysts at Citigroup remain cautious despite the rally. In a note dated February 3, Citi stated, "The DXY has likely shifted to a higher trading range of 106-110 compared to the past two years." However, they warned of an "upside risk" with the potential for the DXY to reach 115, though such a surge would likely be temporary and unsustainable even under the most aggressive tariff scenarios.
The recent tariffs have increased the effective US tariff rate from 2.3% to 10%, translating into a potential 3% upside for the dollar. Citi highlighted that the dollar was already overvalued by 0.8% relative to rate differentials before the tariffs. This suggests a possible additional gain of 2.2%, pushing the DXY toward 110.90.
Despite this, Citi cautioned investors against aggressively buying the dollar at current levels. "While there's room for further gains, much of the tariff-related risk is already priced in," the report noted. The risk/reward ratio at this point is not compelling enough to justify chasing the rally.
The bank also emphasized the unpredictability of tariff-related currency movements. If markets start pricing in worst-case scenarios—such as a 60% tariff on Chinese goods and broad 10% tariffs globally—the dollar could experience further upside. However, Citi believes such extreme measures remain speculative.
In conclusion, Citi advised a balanced approach: "We do not find it attractive to chase the USD higher here, but we also expect downside to remain limited." As the global markets digest the new tariffs, traders are advised to stay vigilant, considering both the immediate impacts and the longer-term implications for currency dynamics.
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