Dollar continues to decline as tensions between the US and China intensify

Important calendar events

• GBP: BRC Retail Sales Monitor, Claimant Count Change, Average Earnings Index, Unemployment Rate, CB Leading Index
• EUR: French Final CPI, German ZEW Economic Sentiment, ZEW Economic Sentiment, Industrial Production
• USD: Empire State Manufacturing Index, Import Prices, API Weekly Statistical Bulletin

USD

The dollar continued to decline on Monday, with the dollar index reaching a 35-month low of 99.6. U.S. Treasury yields also dipped, with the 10-year bond yield dropping from 3.49% to 4.38%. 

Global trade war concerns have been causing turmoil in markets. Investor confidence is low, raising the appeal of safe-haven assets. However, the dollar, traditionally considered a safe-haven asset, is plummeting. The uncertainty of US policies and trade tariffs has undermined investor confidence in the dollar, putting its safe-haven status in question.

US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Concerns that US economic growth will slow down are putting pressure on the dollar, and many analysts are already expressing concerns that the US will enter a recession. Markets this week will continue to focus on Trump’s economic policies and trade tariffs, and Trump’s statements are likely to cause volatility in the price of the dollar. 

Last week, Trump announced that he would pause tariffs for 90 days, against all countries, except China. The situation between the US and China is continuously escalating, with both countries announcing heavier tariffs against each other every day. The US raised tariffs on China to 145% and China retaliated by increasing tariffs on US products to 125%. Trump stated on Sunday that Chinese semiconductors and electronics would be subject to a 20% tariff. Trump backpedalled on Monday, however, saying that he will announce the tariff rate for semiconductors over the next week.

The US Federal Reserve kept interest rates unchanged at its policy meeting in March. FOMC policymakers voted unanimously to maintain the federal funds rate to a target range of 4.25% to 4.50%. Policymakers remained cautious and opted to keep interest rates steady under a climate of economic and inflationary statements. 

Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, stating that the central bank is not in a hurry to lower interest rates. Markets are pricing in two more rate cuts this year, with the first rate cut in June, while a third rate cut is also considered possible. The minutes of the latest Fed meeting were released on Wednesday and revealed that US policymakers anticipate that inflation in the US will continue to rise, and at the same time, economic growth will slow down. 

On the data front, the US economy expanded by 2.4% in the final quarter of 2024, against previous estimates of 2.3%, following a 3.1% expansion in the third quarter of 2024. In addition, the US economy expanded by 3.0% in the second quarter of 2024 and by 1.4% in the first quarter. 

US inflation data released last week came in softer than anticipated, indicating that price pressures in the US remain low. Headline inflation in the US rose by 2.4% year-on-year in March after rising by 2.8% in February against expectations of a 2.5% print. Monthly inflation dropped by 0.1% in March, after rising by 0.2% in February against a 0.1% rise anticipated. Core CPI, which excludes food and energy, rose by 0.1% in March, which was lower than February’s reading of 0.2% and fell below expectations of 0.3%. Annual Core CPI rose by 2.8% in March, below the 3.0% estimate, down from 3.1% in February.

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EUR 

EUR/USD remained steady on Monday, oscillating around the 1.135 level. If the EUR/USD pair declines, it may find support at 1.087, while resistance may be encountered near 1.147.

The ECB lowered its benchmark interest rate by 25 basis points at its latest policy meeting, bringing its main refinancing rate down to 2.65% from 2.90%. In her speech after the policy meeting, ECB President Christine Lagarde reiterated her former statement that the central bank’s policy will remain data dependent and warned that the ECB will need to stay vigilant in these uncertain times. 

The next ECB policy rate decision is this week on April 17, and markets anticipate that the ECB will cut interest rates by another 25 basis points in April. 

Trump has previously announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Last week, however, Trump announced that he will pause tariffs for 90 days, against all countries, except China. EC President Ursula von der Leyen stated that the EU agrees to pause economic countermeasures against the US for 90 days to allow time for negotiations. 

Revised GDP data showed that the Eurozone economy expanded by 0.2% in the final quarter of 2024 after expanding by 0.3% in the second quarter, against original estimates of 0.1% growth. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.

Eurozone inflation rose to 2.3% year-on-year in February after rising by 2.5% in January, against a previous reading of 2.4%. Core CPI, which excludes food and energy, dropped to 2.6% in February from 2.7% in January.

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GBP 

GBP/USD surged from 1.310 to 1.320 on Monday, its highest level since September, boosted by the dollar’s weakness. If the GBP/USD rate goes up, it may encounter resistance at 1.321, while support may be found near 1.270.  

Trump has previously announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Trump’s administration, however, refrained from imposing additional reciprocal tariffs on British imports, as the UK has enjoyed a close partnership with the US for many years. 

BOE policymakers kept interest rates steady in March, and the Official Bank Rate was maintained at 4.5%. MPC members voted 8-1 to keep rates on hold, with only one member voting for a 25 basis point rate cut. 

In his speech after the policy meeting, Bank of England Governor Andrew Bailey stated that there is a lot of uncertainty at the moment, but he still thinks that interest rates are on a declining path. The BOE currently anticipates that the British economy will grow by 0.25% in the current quarter, up from 0.1% previously.

Final GDP data for the fourth quarter of 2024 showed that the British economy expanded by 0.1%, matching previous estimates and following economic stagnation in the third quarter of 2024. Monthly GDP data released on Friday showed that the British economy expanded by 0.5% in February, after contracting by 0.1% in January, exceeding expectations of 0.1% growth. 

Headline inflation in the UK rose by 2.8% annually in February, down from 3.0% in January, against expectations of a 2.9% print. Core inflation, which excludes food and energy, rose by 3.5% year-on-year in February, falling below expectations of 3.6% as well as January’s print of 3.7%.

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JPY

USD/JPY hovered close to a six-month low of 142.0 on Monday, as the dollar’s weakness pushed the currency pair down. If the USD/JPY pair declines, it may find support at 141.6. If the pair climbs, it may find resistance at 148.2. 

The BOJ held interest steady at 0.50% at its policy meeting in March. BOJ Governor Kazuo Ueda stated that the central bank will keep adjusting the degree of monetary easing to support the country’s economy. Ueda stressed, however, that inflation in Japan remains below the BOJ’s 2% target, lowering rate hike expectations and boosting the Yen. On Monday, Ueda stated that the BOJ will make appropriate monetary policy decisions to stably achieve the bank’s 2% inflation target.

Markets anticipate that the BOJ will raise interest rates at least one more time this year, and there is a high probability of a second 25-bp rate hike within the year. The BOJ is expected to raise interest rates by approximately 75 basis points in the next two years, which will bring the central bank’s peak rate to 1.25%. 

Global trade war concerns have been causing turmoil in Forex markets. The dollar plummeted last week, and, at the same time, the safe-haven Yen gained strength, causing a sell-off in the USD/JPY. Japan’s Finance Minister Shunichi Kato has warned that excess FX volatility negatively impacts the Japanese economy. Japanese Prime Minister Shigeru Ishiba stated on Monday that US tariffs have the potential to disrupt the world economic order. Japanese government officials will visit Washington on Thursday to start negotiations with the US in hopes of achieving a trade deal.

Trump has previously announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Japan is a major importer of automobiles to the US, and the tariffs are likely to affect the country’s economy. Trump also announced reciprocal tariffs of 24% on US imports from Japan. Last week, however, Trump announced that he will pause tariffs for 90 days, against all countries, except China.

The BOJ has expressed concerns over Japan's economy, as the effect of US tariffs is likely to affect the country’s industries and economic stability. The BOJ has warned that Trump's tariffs could undermine the wage and price cycle necessary for future interest rate hikes. 

Final GDP data for the final quarter of 2024 showed that the Japanese economy expanded by only 0.6% against expectations of 0.7% growth. Final GDP data for the third quarter of 2024 showed that Japan’s economy expanded by 0.3%, down from 0.7% in the second quarter. 

Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.4% annually in January from 3.0% in December. National Core inflation in Japan came in at 3.0% year-on-year in February against expectations of a 2.9% print, but came down from January’s 3.2% print. In addition, BOJ Core CPI remained steady at 2.2% year-on-year in February.

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Written by:
Myrsini Giannouli

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