Synopsis:

HSBC acknowledges the current wave of USD selling in response to U.S. tariff announcements, driven by recession fears. However, the bank argues that this FX reaction function is logically unsustainable because it ignores the global ramifications of trade barriers, which should eventually rebalance the narrative in favor of the dollar.

Key Points:

• USD Under Pressure:

  • The market’s initial FX response has been to sell the dollar, with growth concerns outweighing inflation risks.

  • The logic: tariffs = tax on consumption = weaker U.S. growth → dovish Fed → weaker USD.

• Tariffs Are a Global Headwind:

  • HSBC stresses that other economies—notably China, the Eurozone, and the UK—are also vulnerable to U.S. tariffs, particularly in a retaliatory spiral.

  • Markets are too focused on U.S. weakness, rather than acknowledging the broader global growth drag from protectionism.

• Fed Easing Expectations Mounting:

  • U.S. yields have fallen as markets price in more rate cuts, reinforcing current dollar weakness.

  • However, HSBC warns that this narrative might be short-sighted if global central banks also begin easing.

• Race to the Bottom Risks:

  • Once global growth downgrades come into sharper focus, the U.S. may regain relative appeal.

  • This could reverse current flows and bring the dollar back into favor, even if absolute growth is slowing.

Conclusion:

While HSBC doesn’t fight the current market bias against the USD, it highlights that the FX market’s recession-based logic may soon crack. With global growth poised to weaken, the relative appeal of the U.S. may re-emerge in what could become a global slowdown narrative. Until then, dollar weakness remains the path of least resistance, but not one to be fully trusted.