The U.S. Dollar Index (DXY) has surged following President Trump's announcement of new tariffs, but Citi analysts caution that further gains may be limited. The tariffs, which include a 25% levy on imports from Canada and Mexico and a 10% tariff on Chinese goods, have increased the U.S. effective tariff rate from 2.3% to 10%, potentially boosting the USD by up to 3%. However, with the DXY already trading at 109.66, Citi suggests that the risk/reward for chasing the dollar higher is not particularly attractive. "FX markets are incredibly efficient, and the gap open has seen USD crosses quickly reach levels which may hold as equilibrium in the short-term," Citi notes.
The report highlights that while there is potential for the DXY to reach as high as 115, such a move would likely be an overshoot. Citi also points out that the market's initial underestimation of tariff risks has now shifted, with future threats being taken more seriously. Despite the immediate tariff risk being priced in, Citi advises caution, noting that "USD downside should also remain limited" due to strong U.S. labor market data and relatively hawkish Fed pricing. The analysts recommend looking for relative value opportunities, such as shorting USDJPY, given the growth concerns surrounding trade wars.