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The Macro Brief – Dollar distrust
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Paul Mackel, Global Head of FX Research, examines the changing drivers of the US dollar and its prospects going forward
Disclaimer: https://www.research.hsbc.com/R/101/xhbSpmX
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Transcript
Introduction to HSBC Global Viewpoint
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
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This podcast was recorded for publication on the 15th of May 2025 by HSBC Global Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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And don't forget to like and follow the Macrobrief wherever you get your podcasts.
Macrobrief and US Trade Policies Introduction
00:00:49
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Hello, I'm Pierce Butler and welcome to the Macrobrief, where we look at the issues driving financial markets across the globe. And today we're focusing on the currency market. It's been just over a month since President Trump announced a series of heavy import tariffs.
00:01:03
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And although the US dollar has stabilized recently, it remains in a weaker state than before the announcements.
State of the US Dollar: Discussion with Paul Mackel
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So what's going on and how should we think about the greenback going forward? To help us find out, I'm joined in a studio by Paul Mackel, Global Head of FX Research. Paul, welcome to the podcast. Thank you very much. Good to have you back.
00:01:21
Speaker
I guess it's going to be hard to be brief, ah despite the title of the podcast, given how there's been so much going on in the currency markets. Absolutely. it's been very fatiguing, the headlines trying to follow over the last, well, not month, but just the last probably four or five months ever since we've had the new U.S. administration coming into being.
00:01:40
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OK, well, let's have a go, even if maybe tomorrow the podcast will be already out of date by some other announcement. But you've just published a latest monthly currency outlook. And to try and make sense of what's happening to the dollar, you've gone back to a framework that you used at the start of the first Trump
Framework for Analyzing the Dollar
00:01:54
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presidency. Can you tell us what that is?
00:01:56
Speaker
Well, it's a very interesting one. And and the team in 2017 started to think differently about the dollar. And prior to that, they were actually quite comfortable with the dollar performing quite well. But heading into the first year of ah Donald Trump's presidency in 2017, some things were changing.
00:02:15
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And of course, what was going on, the global economy was doing quite well or picking up. Some of the political nervousness in Europe was beginning to subside. And it was testing the dollar.
00:02:26
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So the framework that was reconsidered at that time or brought out that is, was resting on three features. It was just looking at the dollar through a cyclical lens, a structural lens, and also a political lens.
00:02:39
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The cyclical side of the dollar at that time was very clear. The headwinds were very prominent because, as I said, the global economy was doing very well. There are some question marks. and hesitations on the structural side of the dollar about what Donald Trump's tax cuts could do with regards to the fiscal outlook.
00:02:57
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And could that bring out some of the structural dollar bears? And in association with that, that was raising concern about some of the political policies at that point. So the three features together, if you look through all the lenses,
00:03:10
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was saying that actually the dollar would be in a weak year, and indeed it was. So let's look at those three components today. How do they play out? Well, rolling it out again, it tells us that we should at least have a soft
Current Analysis: Weak Dollar Outlook
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dollar.
00:03:25
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And I think what has happened is going through the different components once more. On the cyclical side of the dollar, it's unclear, frankly. you know On the one hand, clearly the market is quite nervous about what could happen to the US economy in the next couple of months.
00:03:39
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Will the hard data really deteriorate? They think that could be bad for the dollar, but on the other hand, if you think about the external environment, it's not great either. I mean, there are obvious challenges to China's economy. Mainland Europe, too, is still fairly slow.
00:03:53
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So it's not very obvious that that cyclical driver is a clear dollar negative. What about the structural side of the dollar? I think, yes, there have been some forces moving in that direction, working against the dollar over the last couple of months.
00:04:09
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So what are these? I think that the rapid deterioration in the trade deficit and current account deficit at a time when perhaps some of the capital inflow has been slower, that is into the U.S., has probably been pressuring the dollar.
00:04:23
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But there's a bigger theme about whether there's going to be a shift away from U.S. assets or this de-dollarization argument. Now, the evidence around that is actually pretty pretty mild, pretty meek, and it's going to take a long time to actually figure that out. So we're not fully on board with that.
00:04:39
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However, the political side of the dollar and the policy side of the dollar, I think, has been a clear dollar negative because it's just been the uncertainties about are things going to get worse or better or not, and it's been very difficult for the FX market to navigate it.
00:04:55
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But in turn, the clearest path or cleanest path, that is, is just to be very cautious on the US dollar. There's a broader question on the dollar that you you see discussed in in the press and generally, which I guess so comes back to this the sort of seismic shock that Liberation Day represented, which was the status of the dollar as a reserve currency.
Trust Issues and Reserve Currency Concerns
00:05:15
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And you point out that lot of that is based on trust which has been eroded and could be hard to regain.
00:05:21
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Well, think what had happened in early April was a big wake-up call, especially for myself. When you saw the triple witching of sorts where the dollar was weak and treasury yields were going up and the U.S. equity market was not trading. Which is rare. Very rare indeed. That made me set up and say something's not right here.
00:05:38
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And, of course, that's where I think the market really started to question that trust even more in a greater way. So in the back of my mind, I'm a bit nervous. Can we have this playing out? again.
00:05:49
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But the other thing about trust, which is interesting, is one of our common benchmarks about how the dollar should be moving is just versus interest rate differentials or a basket of interest rate differentials.
00:06:00
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And it's trading much weaker than what those indicators of fundamentals ah would imply. And it's that to me is this idea about trust, that there is a loss of trust and hesitation to believe in the dollar just yet.
00:06:14
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I don't think that there is a clear challenge in terms of the reserve currency aspect. But questions are being asked, and I think for the right reasons. To come back to what we were saying at the start of the podcast, as soon as you published your Currency Outlook, that over the weekend, US and China announced a pause and de-escalation in the punitive tariffs that they had set each other.
00:06:33
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um The equity markets have taken it well, but the dollar is still down around 8% against world currencies since Donald Trump took office. I mean, is what happened a game changer? is it Or to come back to your point about trust, is it actually really hard to get that trust back?
US-China Trade Talks and Dollar Volatility
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I think it feeds into the latter because one week ago, two weeks ago, three weeks ago, it felt like the trade relations between the U.S. and China were going in a very bad direction. And then, of course, suddenly things change.
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And this is this point about policy uncertainty, which is very difficult to understand where it could be going next. So in the back of my mind, can I have lots of confidence that the storm has clearly passed and the dollar is...
00:07:14
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truly warranted to be stabilizing, my confidence in that is low. yeah Because there's nothing to say that one month from now, two months from now, there's new bad news on the horizon and then it begins to challenge the dollar once more. And to be fair, it's only a 90 day pause, isn't it?
00:07:30
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Absolutely. And this is another source of potential volatility that could be coming back into the currency market. So are we in the eye of the storm or has the storm passed? And I don't any think anyone can actually have that confidence or that trust that the storm is truly over.
00:07:45
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So let's come back to domestic US and fiscal policy. Could that improve the outlook? Well, as the typical analysts will say, it depends. If they push the envelope too far in terms of tax cuts and it's not showing the ah reduction expenditures. Just to be clear, they are the the legislative initiative is to extend the tax cuts that were put through in the first Trump presidency. Correct. And I think there are also some wishes to...
00:08:10
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do even other types of tax cuts. And this is where the currency market could be unsettled. So if it's about just extending the tax cuts, then we would say that the dollar should actually take that relatively comfortably.
Impact of US Tax Cuts and Fiscal Policies
00:08:25
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But if it turns into a situation where there are bigger tax cuts coming, but it's not offset by a cut in expenditures or belief that revenues will increase enough, then does that begin to unsettle the currency market and feed into dollar bears once more? You know, this is a risk. It's not our baseline scenario, but it's definitely something we have to be cognizant of. What about tariff revenues? Could that not help to the the balance the equation?
00:08:49
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I believe it helps, but it's not the panacea. yeah So if you come across the estimates from the likes of the Tax Policy Center that say, roughly over 10 years, if the tariffs were made permanent, it could generate $1.7 trillion dollars in revenue.
00:09:05
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But if you look at the costs of the tax cuts altogether, it's much more than that. So it helps, but it's not enough. So it's going to be a big shift in terms of how the market is going to be thinking in the next couple of months.
00:09:18
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What's the Trump presidency going to be doing about fiscal? And will it test the dollar once more? Or will this calmness continue that we've seen in the last couple of weeks? So let's look at the other side of the currency pairs, dollars being weaker. Which of the major currencies has really benefited from that?
00:09:34
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Well, since Liberation Day, or some call Obliteration day ah you still see the so-called safe haven currencies having had the upper hand, the likes of the Swiss franc, the Japanese yen.
00:09:46
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The euro, too, has also held up quite well. Now, of course, it's not quite like that from second of April to where we are now. Some of those currencies have not traded so well. in the last week or two. But overall, it's the euro has been still very, very resilient in the eyes of
Safe-Haven Currencies and Renminbi Stability
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the market.
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And the renminbi? The renminbi, as per usual, very stable. So even though that we had this good news on US-China trade relations, ah the currency, as I said, has continued to be quite stable.
00:10:14
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And you do you see any potential in terms of the domestic policy that China is trying to do in terms of stimulating its its economy? Well, there have been a number of examples of that over the last couple of years, and it hasn't been enough. And the other thing too, which we are mindful of, is that over the next few months, ah in certain Asian countries, including China, there can be quite strong dividend outflow pressures, which can contribute to some currency weakness.
00:10:40
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So I think that's something, again, that the market is going to have to consider. In the back of our mind, we're still got a fairly cautious view on the renminbi for the next few months. So yes, maybe we've had a little bit of a bright spot more recently, but to think that that's going to continue over the next six months, we're more careful with that thinking.
00:10:59
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And just to finish off on the outlook for international currencies, what about emerging market currencies? Anything to highlight there? Well, a number of them have been benefiting by default rather than merit, I'd say. Why? Simply because the dollar has been in a softer orbit.
00:11:14
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But if you dig deeper from a top-down perspective, I'm not that comfortable with emerging market currencies. The global growth outlook is moving in the wrong direction ah for the reasons we all know. The second thing is if you look at the pace of portfolio outflows from emerging markets, it's been very prominent this year, on our measure, running at its fastest pace in terms of outflows ah since the COVID period.
00:11:38
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So there are some warning signs there for emerging market currencies. So just to finish off, on the tariff pauses, ah there's one that ends early July, i'm if I'm right. If we come back to what we're saying about trust, what do we need to see at the end of this pause for trust to come back into the currency markets and the dollar in particular?
Restoring Trust in Currency Markets
00:11:57
Speaker
That's a great question. I think it comes down to a couple of things. First is probably trust that there's going to be less noise. around US policies on trade. I think that would clearly be very helpful and a belief that there is a an end game of sorts to this, or at least a very prolonged pause.
00:12:16
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The second thing, which I think really matters, will come down to the US growth outlook, better visibility where it is and how slow could it be. And for the market to think differently about the dollar, it would have to trust the idea that the US economy can rebound and recover.
00:12:35
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Now, I think the confidence in that is quite low currently. But if it can regain the trust about the cyclical out for the U.S. economy, that could help steady the dollar. And I guess on that point, just to finish off quickly, we haven't really seen a lot of hard data. That's that's sort of coming soon, isn't it?
00:12:51
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Absolutely. And this is this is what I think will matter in the next couple of months. Where are we with the employment numbers? It's not about the survey data, which we all know has been deteriorating for quite some time.
00:13:03
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but it's about the consumption data, the employment data, the hard data. And inflation as well And the inflation data too. It hasn't had the tariff impact yet, but let's see where we are within two to three months.
00:13:15
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The biggest surprise to the currency market would be, of course, what if these numbers still turn out to be relatively okay, that the inflation numbers are calmer yeah and somehow the U.S. economy still proves to be resilient.
00:13:28
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That would be the biggest surprise that I think in 2025. Paul, I know you're just off to Hong Kong, so I'm going to wish you safe travels, and I'm sure we'll have you back on the podcast soon. Thank you very much.
00:13:42
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So we talked a bit about tariffs there and the recent discussions between China and the
Live LinkedIn Discussion Announcement
00:13:47
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U.S. this week, with both sides agreeing to a 90-day pause with a significant rollback in tariffs. For more information on the implications of the deal for the world's two biggest economies, tune in to this week's edition of our sister podcast, Under the Banyan Tree.
00:14:02
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And talking of Under the Banyan Tree, podcast hosts Fred Newman and Harold van der Linde will be joining me on our next live insights on LinkedIn on Wednesday, the 28th of May. We'll be putting Asia's economy and markets under the spotlight, and you'll have the opportunity to ask your questions.
00:14:18
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The event is open to everyone. You don't need to be an HSBC client. You'll find all the details on LinkedIn. Just search for hashtag HSBC research. That's hashtag HSBC research.
00:14:30
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And if you have any questions or comments on what we've discussed today, then please email askresearch at hsbc.com.
00:14:40
Speaker
So that's a wrap. Don't forget to like and subscribe to the podcast and share it with friends and colleagues. We'll be back next week. So until then, thanks for listening.
00:15:09
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Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.