WASHINGTON, January 20, 2026 17:52:00 – Trade war anxieties are bolstering the euro while doing little to calm the yen, signaling a complex shift in global currency dynamics as geopolitical tensions rise.
Currency Markets React to Tariff Threats
Table of Contents
Investors are bracing for potential economic fallout from escalating trade disputes.
- Donald Trump’s threat of new tariffs, set to take effect February 1st, is perceived as a gamble that’s weakening the dollar.
- The euro is gaining ground despite pessimistic forecasts from Goldman Sachs regarding the impact of potential tariffs on the eurozone.
- Japan’s currency position is vulnerable amid domestic political shifts adn a “Takaitchi trade” favoring stocks over bonds and the yen.
- Gold prices have surged past $4,700 per ounce, fueled by trade war risks and concerns about the Federal Reserve’s independence.
Donald Trump’s recent tariff threats represent a political maneuver aimed at bolstering American companies through a deliberately weaker dollar. While the Supreme Court could possibly invalidate existing global import duties, limiting the White House’s ability to easily impose new ones, markets are well-versed in Trump’s pattern of aggressive rhetoric followed by strategic retreats – or escalation when counterparts are prepared to respond, as seen with China in 2025. Investors are largely mirroring the market response from April, when the EURUSD climbed following the introduction of substantial U.S.tariffs and a wave of ‘sell America’ sentiment.
Adding to the downward pressure on the dollar is a legal challenge concerning the potential dismissal of Lisa Cook. The White House appears to have a stronger chance of success in this case then it did with the Supreme Court’s review of tariff legality. Removing a Federal Open Market Committee (FOMC) member could establish a precedent, granting the president greater latitude in shaping the Committee with policymakers inclined towards looser monetary policy.
Eurozone Resilience Amidst Tariff Concerns
The euro is demonstrating surprising resilience, even in the face of Goldman Sachs’ projections of economic slowdown. The bank estimates a 10% tariff could reduce the eurozone’s real GDP by 0.1-0.2%, with germany experiencing a more meaningful 0.3% decline if tariffs reach 25%. However, investors are anticipating potential fiscal stimulus measures to counteract the economic impact of a large-scale trade war.
The weakening dollar and verbal interventions from officials have provided only temporary relief for the bears on USDJPY. Japanese Finance Minister Satsuki Katayama asserted that the agreement with Washington justifies currency intervention, signaling the goverment’s intent to take “decisive measures” against speculative Forex market movements.
Yen Vulnerability and Domestic Factors
Despite these interventions, the yen remains vulnerable, particularly as the “Takaitchi trade” gains momentum ahead of parliamentary elections. This strategy involves actively buying Japanese stocks while concurrently selling bonds and the yen.
Escalating trade war risks between the U.S. and Europe, coupled with concerns about the independence of the Federal reserve, have propelled gold prices above $4,700 per ounce for the first time in history. However, a potential cancellation of tariffs by the Supreme Court could temper enthusiasm among precious metal investors.
