06:35 AM EDT, 05/22/2025 (MT Newswires) -- There are a number of factors that can help explain the change in the foreign exchange reaction to United States tariffs -- what was a US dollar (USD) positive in President Donald Trump's first administration, turned to being a dollar negative in Trump 2.0, said MUFG.

US dollar over-valuation, a different point in the U.S. economic cycle (slowdown ahead) and greater inflation risks and debt sustainability risks for the U.S. are some examples, wrote the bank in a note to clients.

Another is the expectations that the key U.S. trading partners have had ample time to prepare for the threat to trade with the U.S. and have shifted efforts to supporting domestic demand to offset the negative hit to external demand, stated MUFG. In that regard, it was interesting to see a new imitative announced by the European Union on Wednesday to support businesses in the EU.

No doubt linked to the Draghi report -- The Future of European Competitiveness -- the EU executive president in charge of industrial policy, Stephane Sejourne, outlined a new plan to reduce barriers to trading across the member states. The plan was in recognition that the approach of companies who "internationalise before they Europeanise" was no longer possible given the uncertain international business climate.

The plan will break down the numerous different regulations that exist at a country level in order to streamline rules across the region. The plan aims to create a new company category -- "small mid-caps", which have 250-750 employees with a certain turnover or asset size (the EU estimates there are 38,000 such companies).

The plan will tackle the 10 most harmful barriers to doing business in the EU, like fragmented rules on packaging, labelling and waste. While these aren't developments that will move the dial in terms of financial market moves, now the plan is further evidence that over the medium-to-long-term, the EU could be better positioned to compete and supports MUFG's view that the euro (EUR) can strengthen over the medium-to-long-term and possibly take advantage of the U.S.-China chasm.

In the near term though, Bloomberg reported Wednesday that the EU has prepared and is expected to share a revised trade proposal with the U.S. The proposal covers a wide array of economic issues but does include a plan for a gradual reduction in tariffs to zero for industrial goods and non-sensitive agricultural goods.

The bank currently assumes the 20% reciprocal tariff will go live in July, which will result in retaliation from the EU so it would be a positive surprise if an agreement were reached with the EU. Trump's comments on the EU suggest a deal is unlikely.