Dollar volatile on US tariff uncertainty

Important calendar events

• JPY: Current Account, Economy Watchers Sentiment
• EUR: French Trade Balance
• USD: NFIB Small Business Index

USD

The dollar was volatile on Monday as the uncertainty around US trade tariffs caused market turmoil. The dollar index dipped to 102.3 early in the day, then rallied, rising to 103.3. U.S. Treasury yields also strengthened, with the US 10-year bond yield rising from 4.00% to 4.13%. 

US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. 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 dollar price. 

Last week, Trump announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. 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.

Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Import taxes will raise the price of many products, fueling inflationary pressures. Other nations are likely to reciprocate with tariffs of their own, starting global trade wars, which may lead to economic deterioration and rising inflation in many countries.

Reports on Monday that Trump intends to pause tariffs for 90 days lifted market sentiment briefly. According to Reuters and other media, US National Economic Council Kevin Hassett stated that Trump is considering a 90-day pause on tariffs for all of its trading partners, except China. The White House, however, issued a strong denial against these rumors, causing traders to turn to the safe-haven dollar.

Trump announced last week 34% duties on imports from China, which is likely to have a heavy impact on China’s economy. China retaliated with 34% tariffs on US imports, causing the crisis to escalate. Trump further exacerbated matters on Monday by threatening China with additional 50% tariffs, starting on April 9.  

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. 

Fed Chair Jerome Powell warned on Friday that Trump’s tariffs pose a risk to economic growth and are likely to raise inflation in the US. Fed rate cut expectations dropped after Powell’s comments, providing support for the dollar.

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 Unemployment Claims released on Thursday dropped to 224K for the week ending March 22 from 225K the week before, against expectations of a 225K print.

Headline inflation in the US rose by 2.8% year-on-year in February after rising by 3.0% in January against expectations of a 2.9% print. Monthly inflation rose by just 0.2% in February, after rising by 0.5% in January against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.2% in February, which was significantly lower than January’s reading of 0.4% and fell below expectations of 0.3%. Annual Core CPI rose by 3.1% in February, below the 3.2% estimate, down from 3.3% in January.

This week, markets will focus on the release of US CPI inflation data on the 10th and PPI data on the 11th.  

TRADE USD PAIRS

EUR 

EUR/USD traded sideways on Monday, oscillating around the 1.095 level. If the EUR/USD pair declines, it may find support at 1.077, while resistance may be encountered near 1.114.

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. 

Last week, Trump announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Several EU countries, such as France, Italy, and Germany export cars to the US and will be affected by these tariffs. Germany, in particular, sells 13% of its total automobile exports to the US. In addition, Trump announced 20% reciprocal tariffs on all US imports from the EU. 

EC President Ursula von der Leyen stated that the tariffs will have a significant impact on the global economy and warned that the Eurozone is ready to implement countermeasures if talks with the US fail. In an interview on Monday, der Leyen stated that the EC is ready to start negotiations with the US but reiterated her previous warning that they are also ready to take countermeasures. EU trade commissioner Maros Sefcovic said on Monday that they have made an offer to the US for zero-for-zero tariffs for cars and all industrial goods.

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.

TRADE EUR PAIRS

GBP 

GBP/USD plummeted from 1.285 to 1.271 on Monday as the dollar gained strength. If the GBP/USD rate goes up, it may encounter resistance at 1.320, while support may be found near 1.256.  

Last week, Trump 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. The Sterling plummeted on Monday, however, as trade war concerns drove investors away from high-risk assets such as the Sterling.

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. The British economy contracted unexpectedly by 0.1% in January after expanding by 0.4% in December, missing 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%.

TRADE GBP PAIRS

JPY

USD/JPY plunged from 145.5 to 148.0 on Monday, as the dollar gained strength. If the USD/JPY pair declines, it may find support at 145.0. If the pair climbs, it may find resistance at 151.3. 

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. 

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%. 

Last week, Trump 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. 

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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