Bank of America says some tariff risk premium is likely to remain in US dollar

BofA strategists highlighted the current state of the US dollar, noting that while there is no trade deficit emergency prompting immediate tariffs, a partial reduction in the risk premium implied by the DXY index is evident.

The firm pointed out that some tariff risk premium is likely to remain due to ongoing uncertainty, but the more pressing short-term risk for the dollar comes from its proximity to CTA stop-loss levels.

The analysis by BofA suggests that despite concerns over tariffs and potential changes in trade policy, the US dollar has maintained its strength. This resilience is partially attributed to a lack of significant deceleration in the US services sector, which continues to support the currency against potential sell-offs.

The firm's observation indicates that while tariff discussions and CTA unwinds are factors in the market, they have not yet led to a noticeable slowdown in the services industry compared to manufacturing.

The US dollar has seen an optical benefit from the equity sell-off that began in mid-December, according to BofA. However, this apparent risk-off bid is less obvious when examined more closely.

The analysts suggest that the dollar's strength is more likely driven by the emergence of a tariff risk premium, which has implications for both currency and equity markets. This is reflected in the disparity between the DXY dollar index and the level implied by rate differentials, even after the sell-off on Inauguration Day.

BofA's analysis indicates that while some level of risk premium due to tariff uncertainty is expected to persist, there is no immediate threat of a major decline in the US dollar's value. The analysts emphasize that the lack of a deceleration in US services relative to manufacturing is a crucial factor in preventing a peak in the USD. This suggests that as long as the services sector remains robust, the dollar is likely to retain its floor against sell-offs.

In conclusion, BofA's commentary provides an assessment of the US dollar's performance in the face of tariff discussions and market movements. The firm's analysts have identified the proximity to CTA stop-loss levels as a more significant immediate risk to dollar bulls than the ongoing tariff noise. The continued strength in US services is seen as a key support for the currency, helping to mitigate the impact of other market risks.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Source: Investing.com

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