New Zealand Dollar Leads G10 On News Tariff News
- Written by: Gary Howes
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Image © Adobe Images
The New Zealand Dollar led the G10 currency pack on news that Donald Trump would apply a matched approach to tariffs.
"Currency markets are breathing a sigh of relief after a report suggested that the incoming Trump administration could follow a 'gradual' trajectory in ratcheting tariffs higher," says Karl Schamotta, a foreign exchange analyst at Corpay.
Reports say an idea gaining traction involves a schedule of graduated tariffs increasing by about 2% to 5% a month.
Those working on the plan include Trump appointees Scott Bessent, Kevin Hassett and Stephen Miran, suggesting these are no mere rumours.
The New Zealand Dollar is highly sensitive to global investor sentiment and is understandably outperforming peers amidst investor relief that global trade won't be bludgeoned by a club that comes in the form of a blanket tariff.
The GBP/NZD exchange rate is down a further 0.60% on the day at 2.1728, and the NZD/USD has recovered from its lowest level since October 2022 at 0.5541 to quote at 0.5594.
Currency market sentiment is highly sensitive to what Trump will do on tariffs, and there is increasing evidence he intends to apply a nuanced approach when applying them.
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The New Zealand Dollar was one of 2024's biggest losing currencies amidst fears Trump would impose a universal tariff on all trading partners, reserving an even higher tariff for China. The NZD is particularly sensitive to Chinese sentiment, and reflected downbeat expectations.
That this worst-case scenario is likely to be avoided is helping the currency at the time of writing.
Trump has not made up his mind and is clearly in the process of finalising his approach, meaning the story can take more twists and turns.
But the deeper message is that Trump knows a universal tariff will be too damaging for U.S. consumers and risks damaging his standing in their eyes.
All roads point to a nuanced approach whereby Trump threatens and levies tariffs in order to improve his hand in geopolitical and trade negotiations with various countries and blocs.
Schamotta warns of significant risks to the likes of the New Zealand Dollar if Trump does stick with an aggressive approach:
"A 26-percent per annum increase in tariffs would deliver a severe economic shock by any conventional definition. Inflationary processes are defined by a series of price increases—not one-off moves—and can take months or years to develop, meaning that there is no viable feedback mechanism to tell officials when they reach the point of no return.
"And currency markets would undoubtedly front-run expected changes as the administration’s end-point plans are clarified, meaning that the financial system would suffer an increase in exchange rate volatility in combination with already-elevated levels of uncertainty."
