21-05-2025
Citi (C) Sees Dollar Decline Following Tariff Softening at G-7 Meeting
Citigroup (C) expects the U.S. dollar to weaken following discussions at this week's Group-of-Seven meeting, as global leaders tackle currency issues tied directly to trade negotiations and tariff reductions. Citi analysts led by Osamu Takashima believe Washington is positioning for a subtle depreciation of the greenback, especially as tariff agreements ease tensions with East Asian trade partners. Currency policy has become a significant focus at the G-7 summit, with South Korea, Taiwan, and Japan engaging directly with U.S. officials on the topic. Japan's Finance Minister is slated for bilateral meetings with Treasury Secretary Scott Bessent, heightening expectations that the U.S. will press for currency appreciation among key trade partners as part of broader tariff negotiations. Market Overview:
U.S. dollar expected to weaken following G-7 meetings.
Currency appreciation a potential condition for reduced tariffs.
East Asian nations primary focus in currency discussions.
Key Points:
Citi forecasts dollar depreciation as tariffs are rolled back.
U.S. likely targeting Japan and China's currency policies.
Role of central banks emphasized by Treasury Secretary Bessent.
Looking Ahead:
Dollar poised for further declines pending trade clarity.
Future U.S. interest rates influenced by currency reserve policies.
Tariff negotiations to significantly shape FX market sentiment.
Bull Case:
If the U.S. successfully encourages trade partners like Japan and China to allow their currencies to appreciate as part of tariff reduction deals, it could boost the competitiveness of U.S. exports and help reduce the U.S. trade deficit.
A more balanced global currency landscape, potentially facilitated by G-7 discussions, could lead to smoother trade relations and reduced market volatility in the long run.
A weaker U.S. dollar, as forecasted by Citi, could make U.S. goods and services more attractive internationally, potentially benefiting U.S. multinational corporations and export-oriented industries.
The focus on central bank investment strategies for foreign currency reserves influencing U.S. interest rates, rather than direct intervention, suggests a more market-driven approach to currency adjustments.
Successful negotiations leading to tariff rollbacks and managed currency adjustments could signal a de-escalation of trade tensions, fostering a more stable global economic environment.
Bear Case:
A weakening U.S. dollar, as anticipated by Citi and already evidenced by a 4% drop in the Bloomberg Dollar Spot Index since April, could signal declining confidence in U.S. fiscal and trade policies and the overall safety of U.S. assets.
Pressure from the U.S. for currency appreciation from East Asian trade partners, particularly Japan and China, could be met with resistance or lead to competitive devaluations, increasing FX market volatility.
The depreciation of the dollar may be driven by concerns over the U.S. economy, the national deficit (highlighted by Moody's recent downgrade), and a lack of fiscal restraint, rather than a managed policy outcome.
Uncertainty surrounding the sustainability of U.S. tariffs and the chaotic nature of their implementation has already negatively affected the dollar; further policy shifts could exacerbate this.
If the U.S. pushes too aggressively for currency adjustments, it could strain relationships with key allies and trading partners, potentially complicating broader G-7 objectives and cooperation on other economic issues.
A continued decline in the dollar could lead to imported inflation in the U.S. and may necessitate higher interest rates in the future to attract foreign capital, potentially slowing domestic economic growth.
Citi analysts underscored that rather than pursuing a broad Plaza Accord-style intervention, Treasury Secretary Bessent is expected to emphasize the role of central banks and their investment strategies in influencing currency markets. This nuanced approach could result in continued downward pressure on the dollar as tariff barriers are progressively lowered. Since the introduction of tariffs in April, the Bloomberg Dollar Spot Index has already fallen about 4%, reflecting heightened uncertainty around U.S. fiscal and trade policies. Citi's outlook suggests these trends could persist, especially if U.S. trade strategy continues favoring tariff cuts accompanied by a softer dollar policy stance.
