(Bloomberg) -- Allianz Global Investors is preparing for the dollar’s rally to reverse at the start of next year, saying China is likely to respond to Donald Trump’s trade tariff threats.

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Greg Hirt, chief investment officer of multi-asset strategies at AllianzGI, said markets aren’t prepared for retaliatory tariffs that could hurt the US economy and prevent the greenback from strengthening further. He sees a risk of this happening soon after Trump takes office in January.

The dollar has been rallying on expectation Trump will impose higher levies on its main trading partners, fanning inflation and limiting the Federal Reserve’s ability to cut interest rates. An index of the greenback’s strength hit the highest in two years and many expect it to continue to rise.

“It could well be that in the first quarter of next year we start to see a contrary movement” on the dollar, said Hirt. This “will take many by surprise because that’s not at all what is anticipated.”

Trump said he would impose additional 10% tariffs on goods from China and 25% tariffs on all products from Mexico and Canada in posts to his Truth Social network on Monday.

China responded on Tuesday by defending its track record and refrained from mentioning any planned retaliation, while Mexico’s President Claudia Sheinbaum suggested the nation could respond with levies of its own.

Hirt said retaliatory tariffs would have an outsized impact on the dollar because the market has been heavily positioned in its favor. Speculative traders boosted bets on dollar gains in the week ending Nov. 19 to the most bullish level since late June, Commodity Futures Trading Commission data show.

AllianzGI, which has $590 billion in assets under management and is owned by global financial services group Allianz, is looking to reverse some of the long dollar positions it has held since before the US presidential election. A fall in the euro below $1.05 could provide such an opportunity, as Hirt says the currency is unlikely to reach parity with the dollar.

The common currency could also get a boost from a stronger German economy if the government that wins the snap election in February announces stimulus measures. Friedrich Merz, who heads the front-runner party, has indicated he may reform the country’s restrictions on borrowing, which could open the door to much needed investment.