Trading Guide Under Trump’s Tariff: Favor Euro and Yen, Emerging Market Equities Seen Most Optimistic in Two Years

TradingKey - Trading data and investor surveys indicate that Trump’s tariff policies are indeed weighing on U.S. dollar assets, and the sell-off of the greenback is more than just Wall Street analysts’ commentary. Amid prolonged uncertainty over trade policy, investors are showing a stronger preference for the euro and Japanese yen, and increasing their optimism toward emerging market equities.

Unlike previous periods of global turmoil, where the U.S. dollar typically strengthened, since early April’s so-called “Liberation Day,” demand for the dollar has clearly weakened.

Institutions such as Morgan Stanley and Goldman Sachs pointed out that traders are now paying a declining premium in cross-currency basis swaps, indicating a gradual decline in market preference for dollar liquidity.

Based on movements in cross-currency basis spreads, Morgan Stanley analysts noted that investor interest in dollar-denominated assets is waning, while appetite for assets denominated in the euro and yen is rising, reflecting a clear trend of capital moving away from the U.S. dollar due to tariff-related concerns.

BNP Paribas analysts added that there have been significant cross-border capital flows in recent months, particularly from the United States to Europe.

Goldman Sachs further projected that in the cross-currency basis swap market, the euro could become more expensive than the U.S. dollar, a rare phenomenon over the past two decades.

In terms of equities, according to a survey conducted by HSBC between May 2 and June 18, which included responses from 100 fund managers, 44% of respondents expressed optimism about emerging market equities over the next three months, up from 36% in March, and marking the highest level since March 2023.

HSBC noted that the general market sentiment expects merging market equities to rise and outperformance relative to developed market stocks.

During the survey period, investors considered several key factors influencing markets, including:

• The economic impact of Trump tariffs
• Geopolitical risks stemming from the Israel-Iran conflict
• The Fed’s cautious stance on rate cuts

During this period, the MSCI Emerging Markets Equity Index rose more than 6%, and the MSCI Emerging Markets Currency Index gained 2.6%, hitting a record high.