JP Morgan Warns of Dollar Strength on April 02 Tariffs

The Chase Tower, New York © Kristen Cavanaugh, Flickr, reproduced under CC licensing

Another Wall Street Bank thinks tariffs will prove supportive of the Dollar.

The Pound-to-Dollar exchange rate could be set for a weaker second quarter of the year if the predictions of some investment banks come right.

Analysts at Citi and JP Morgan are the latest to think the U.S. currency could be set for a rebound in the coming weeks as the U.S. massively expands its tariff programme on April 02.

The reciprocal tariff announcement will be the largest of Donald Trump's second term, with analysts anticipating significant implications for global financial markets.

"We maintain our forecasts for a USD rebound in Q2," says Daniel Tobon, a currency analyst at Citi. "Tariff risks look underpriced and we expect USD undervaluation to correct on a hawkish April 2 announcement."

Economists at JP Morgan are in agreement.

"A 10% pts increase in tariff rates would result in 5% strengthening in the broad dollar index," says Arindam Sandilya, an analyst at JP Morgan.

For JP Morgan, there are a number of possible scenarios that the U.S. will pursue, with varying degrees of implications for the Dollar.

"Tariff imposition matching VAT would have the greatest growth impact both on the U.S. and the RoW given the sheer magnitude this would entail," says Sandilya.

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On April 02 the White House will announce tariffs on countries that tariff U.S. imports. Crucially, the net will be widened to target countries that are deemed to be applying 'non-trade' tariffs like sales taxes.

President Donald Trump has warned that countries that impose a Value-Added Tax (VAT) will also be subject to tariffs, which brings the UK into scope.

An unexpectedly large tariff on the UK because of VAT would surprise a marketplace that thinks Britain is relatively well insulated from U.S. tariffs owing to its balanced goods trade book with the U.S.

Above: The Dollar index is stabilising and forming a base following a sharp fall. 

The Pound-to-Dollar exchange rate has risen from a 2025 low of 1.21 to a high of 1.30 amidst a broader softening in the Dollar, which reflects a belief that tariffs will damage the U.S. economy.

The Dollar's weakness that followed the March 03 tariff decisions surprised the financial market orthodoxy, which said tariffs were inflationary for the U.S. and, therefore, supportive of the Dollar.

Strategists at Morgan Stanley say fundamentals increasingly point to a lower Dollar as the 'U.S. exceptionalism' narrative evolves toward 'global convergence'.

"We remain bearish on the DXY and continue to recommend long EUR, GBP, and JPY positions versus the USD," says strategist David S. Adams.

The view reflects a clear divergence in views on the way forward for the Dollar and FX in general: Will the USD continue to weaken as tariffs are expanded, or will a more traditional relationship reassert that sees the USD rise?

The Dollar's weakness seen through March could also reflect the washout in 'long' U.S. Dollar positioning that has been in place for some time, which could mean some of the recent movement is technical in nature.

"It is also likely that the USD will not be as insensitive to tariff announcements as the last two months of ‘tariff fatigue’ may have lulled markets into believing, for the simple reason that the dollar’s valuation and positioning overhangs have corrected substantially from their pre-inauguration highs," says JP Morgan's Sandilya.

Because of this, JP Morgan thinks "the slate is much cleaner for the greenback to respond to tariff stresses more traditionally."