US president Donald Trump’s on-again/off-again tariff policy has reignited volatility in foreign exchange markets and is sowing confusion among corporate treasurers and traders, bankers say, discouraging companies from making big investment decisions or adjusting FX hedging programmes amid the chaos.
Tail risk in euro-dollar options markets has risen to its highest level in two years by some measures, according to analysis by Societe Generale, suggesting traders are concerned about sharp swings in the world’s most traded currency pair. That comes as investors have struggled to parse the implications of the fast-paced tariff announcements coming out of Trump's White House.
Sweeping penalties on Canadian and Mexican goods were announced on February 1 only to be shelved two days later, causing those countries' currencies to whipsaw on Monday before settling down later in the week. A 10% tariff on some Chinese imports has remained, however, and Trump has threatened to target the European Union next.
All that has left companies and investors with large FX exposures scratching their heads: on one hand concerned about the potential for tariff-related market moves, but also reluctant to take any action given Trump’s unpredictable approach.
“One hour there are tariffs on Mexico, the next there aren’t – this uncertainty isn’t the right environment to be making big decisions or changes to how you’re positioned,” said Amol Dhargalkar, managing partner and chairman of the board of directors at hedging advisory firm Chatham Financial.
“Markets are standing on very unstable ground right now and clients are highly unlikely to make any meaningful investment decisions or changes to their hedging strategies in the face of this uncertainty.”
Canadian dollar volatility on Monday hit its highest level since 2022, according to CME Group, while the Mexican peso swung wildly following the political seesawing in Washington. Even countries not yet singled out for penalties have seen increased currency volatility this past week as FX traders have treated tariffs more as a global shock than as a contained series of country-specific episodes.
Euro-dollar saw “the highest levels of minute-by-minute volatility in years” on Monday, according to Kristjan Kasikov, global head of FX quantitative investor solutions at Citigroup, who said that market choppiness has made it “hard to take directional views on the back of tariff announcements".
Storm after the calm
The rise in FX market volatility follows a sustained period of calm in currency markets for much of last year when central banks became less active after hiking interest rates aggressively. The dilemma now facing companies and investors is that the FX implications of tariffs can be significant depending on how they are enacted – and whether they’re kept in place.
The euro has already fallen from US$1.12 in September, before financial markets started to bake in a higher chance of Trump’s election, to about US$1.04. FX strategists said the euro could fall to parity or below depending on what happens with tariffs and central bank policies.
China’s closely controlled onshore renminbi market has also weakened against the US dollar in anticipation of tariffs, from about Rmb7 before the election in November to just below Rmb7.30 now. Strategists at Barclays believe it could move to around Rmb7.57 based on a 10% tariff and Rmb8.50 based on a 60% tariff.
FX market volatility is expected to continue “at least into spring, as tariffs threats are now moving towards concerns of currency war escalation", Olivier Korber, research analyst at Societe Generale, wrote in a recent report. China has already announced retaliatory tariffs on around US$20bn of annual US imports, according to research firm Capital Economics.
Such “announcements might be trade negotiation tactics, but they are significantly increasing global uncertainty”, Korber said.
Betting on a stronger US dollar has been a favourite "Trump trade" given his administration’s preference for tariffs and looser fiscal policy, although the US dollar this year has struggled to maintain its late 2024 rally. Hedge funds have adopted a modest US dollar selling position since Trump’s inauguration last month, according to Kasikov, suggesting the delay in most of the proposed tariffs may have prompted some to rethink their bets.
Themos Fiotakis, global head of FX and emerging market macro strategy at Barclays, said that while the strong US dollar view remains prevalent in the market, what has become a lot harder is “the day-to-day management of investment positions in dollars given the unexpected nature of some of the headlines and tweets that we’ve seen from the Trump administration".
Dominic Bunning, head of G10 FX strategy at Nomura, said people have been increasing and decreasing their long US dollar positions since the election depending on the severity of the implied tariff regime, as well as signals on monetary policy from the Federal Reserve.
“Overall, it still makes sense to be long dollars given the likelihood these tariffs persist – even if they’re not entirely one way,” he said.
