Synopsis:

Credit Agricole observes that the USD is behaving erratically, reflecting a broader FX market stuck in a loop—oscillating between trade war escalation fears and de-escalation hopes. This volatility is distorting traditional USD behavior and undermining conviction among investors.

Key Points:

• FX investors are locked in a repetitive cycle of:

  • Trade war escalation fears → risk aversion → USD strength.

  • De-escalation hopes → improved risk sentiment → USD reversal.

• The week began with renewed fears of higher US tariffs on steel and aluminum and blame games between the US and China.

• Market hopes rebounded after suggestions that Presidents Trump and Xi might engage in high-level talks soon to rekindle trade negotiations.

• Historically, de-escalation optimism has driven capital flows back into US assets, providing temporary support to the USD.

Conclusion:

The USD's path has become increasingly reactionary and sentiment-driven, with short-term swings dictated by geopolitical headlines rather than fundamental data. Until trade clarity emerges, investors may struggle to build sustained conviction in USD direction.