LIVE MARKETS-Tariff risk underpriced, again

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TARIFF RISK UNDERPRICED, AGAIN

The dollar index is heading for its third-straight weekly loss and fifth weekly fall in six, with expectations on U.S. import tariffs key for the U.S. currency's direction.

Nevertheless, the outsized swings in markets that that were observed early in the year on the back of Trump's every word on tariffs are fading.

"Markets have broadly had a more muted response to the latest headlines on reciprocal and critical import tariffs, likely in part due to the long lead time on any action and broader skepticism on implementation," writes Goldman Sachs.

Should reciprocal tariffs come into effect, GS believes the Brazilian real, Indian rupee, Thai baht and euro could see the largest FX adjustments among economies with the greatest tariff differentials.

"Ultimately, not all tariffs are equal when it comes to FX," GS says.

"But given the unwind of premium in key crosses in recent weeks, we once again think tariff risks look underpriced, making long Dollar exposure now look even more attractive."

Their favoured expression is through shorting EUR/USD, based on their baseline for a further increase in China tariffs in addition to higher tariffs on EU autos.

GS also believes the risk of Canadian tariffs is greater than priced, "arguing for more premium in CAD."

"While being outright long Dollars might be challenging in this environment, both short EUR/USD and long USD/CAD in options screen as relatively inexpensive hedges," they say.

(Samuel Indyk)

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