Synopsis:

ING warns that the US dollar could be approaching another confidence crisis as markets reassess inflation and recession risks stemming from heightened tariffs on Chinese imports. A weakening belief in the dollar’s safe-haven status is becoming more evident.

Key Points:

• Tariff Disparity Impact:

  • Markets view US inflation and recession risks as more severe due to a lack of substitutes for many Chinese goods.

  • Conversely, Chinese exporters appear increasingly insulated from new tariffs.

• Structural Delays in Trade Talks:

  • While negotiations with other partners (e.g., South Korea) are underway, ING notes that trade deal timelines are inherently lengthy and complex.

• Warning Signs in Market Metrics:

  • A continued outperformance of European equities versus US equities would reflect shifting investor preferences.

  • The 10-year US-EU yield spread has widened from 154bp to 175bp, reinforcing the narrative of declining investor confidence in US assets.

Conclusion:

With rising inflation concerns, stalling trade deals, and potential capital flight to Europe, ING cautions that the dollar’s weakening may go beyond cyclical softness. A deeper erosion of its safe-haven appeal could accelerate losses and drive a broader confidence crisis.