Are you ready for the countdown to the new round of tariffs?

In March, the Powell Put briefly ignited market risk appetite, but the optimism in the U.S. stock market did not last long.

After the European session began yesterday, U.S. stock futures started to decline again, leading the market into a risk-off sentiment, with currency pairs like EURJPY and AUDJPY plummeting.

Three reasons.

1. As the April 2nd effective date for reciprocal tariffs approaches, the market trading theme has shifted back from "European exceptionalism, East rising and West declining" to "tariff threats."

Bessent stated on Tuesday that on April 2nd, each country will receive a "tariff number" from the U.S. regarding their trade restrictions, which represents the tariff levels they will face.

Which countries will be hit the hardest? Bessent criticized countries facing high tariffs from the U.S., calling them "the dirty 15," where 15% of the countries will bear most of the tariffs. The list of these countries has not yet been released, but we can infer from the U.S. trade deficit and tariff rates that the most affected will be India, the European Union, Vietnam, South Korea, and Brazil.

What is the impact of tariffs on the dollar? Here is a dollar smile curve model from JP Morgan.

The horizontal axis represents economic conditions (the right side is strong economy, the left side is weak economy), and the vertical axis represents the dollar exchange rate.

• Top left: Uncertainty from tariffs leads both the U.S. and other countries into recession, resulting in a global recession, thus the dollar strengthens due to safe-haven demand;

• Top right: The implementation of large-scale tariffs makes the U.S. economy stronger than other countries, thus the dollar strengthens;

• Bottom: Tariff delays or unmet expectations lead to resilience in other countries' economies, thus the dollar weakens.

Since February, China's tech narrative and Europe's fiscal stimulus have made other countries' economies perform better than the U.S., placing the dollar at the bottom of the smile curve. As the April 2nd tariff date approaches, the dollar may swing from the bottom of the smile curve towards both sides at any time.

2. Long positions in the euro have become a bit crowded.

According to a Bank of America survey of investors in March, "longing European stocks" is nearing surpassing "longing the U.S. stock market's seven sisters," becoming the new "crowded trade."

3. Emerging markets are experiencing a stormy turmoil.

The Turkish lira and Indonesian rupiah have both seen significant depreciation, although each has its own domestic reasons:

• Turkey: The arrest of a presidential candidate has triggered political risks;
• Indonesia: The new government has significantly reduced policies, coupled with weak consumption data, disappointing the market;

However, the turmoil in these emerging markets is not an isolated event. On one hand, Trump's reciprocal tariffs have severely impacted ASEAN countries, which serve as trade transit points, and the slowdown in the U.S. economy has weakened Asian exports, leading to significant capital outflows from Southeast Asian countries this year; on the other hand, recession fears have triggered a reversal of previous carry trades (risk on: borrowing yen to buy high-yield currencies; risk off: yen appreciates, high-yield currencies collapse).

From the market trend perspective, the market may be overly optimistic about April 2nd, as the implied volatility in the options market continues to decline.

Before the uncertainty of tariffs on April 2nd, the U.S. dollar index may continue to rebound somewhat, with the support level at 103.5 currently looking solid. In risk-averse situations, JPY will continue to outperform high-risk currencies, and USDCNY will maintain a range view of 7.23-7.28.

Author of this article: Fang Yuqi, Source: Good Morning Forex, Original title: "Countdown to a New Round of Tariffs, Are You Ready?"

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