- The dollar fell almost 1% on Monday after reports that might go easy on import tariffs.
- Traders anticipate a gradual Fed easing cycle this year.
- The US ISM manufacturing PMI increased to 49.3, above estimates of 48.2.
Currency futures jumped on Monday as the dollar collapsed on news that Trump might only impose tariffs on critical goods. At the same time, the recent greenback rally paused as market participants awaited crucial employment data for clues on the Fed’s easing cycle.
Dollar Index (Source: Bloomberg)
The dollar fell almost 1% on Monday after reports that might go easy on previously proposed import tariffs. This relieved most currency futures, especially the Canadian dollar and the euro. Initially, Trump proposed heavy tariffs on goods from other countries, mainly Canada, the Eurozone, and China.
As a result, analysts predicted increased demand for US goods, boosting the economy and supporting the dollar. On the other hand, the US’s trading partners, like Canada and the Eurozone, would perform poorly due to a decline in exports. Consequently, currency futures have been falling since Trump’s win.
The Canadian dollar rose on Monday as markets expected Prime Minister Justin Trudeau’s resignation. Such an outcome would clear up some political uncertainty ahead of an election.
Last week, currency futures fell as the greenback rallied strongly to open the year. The move came as traders anticipated a gradual Fed easing cycle. During the December meeting, the Fed projected only two rate cuts totaling 50-bps this year. This came as a surprise after September’s forecast showed 100-bps of rate cuts in 2025. The new projections show that interest rates will remain high in the US compared to other major economies. Therefore, the dollar will have an edge over its peers.
Meanwhile, data last week revealed an improvement in US business activity in the manufacturing sector. The ISM manufacturing PMI increased to 49.3, above estimates of 48.2. Meanwhile, unemployment claims data on Thursday revealed an unexpected decline, indicating a resilient labor market.
This week, the US will release more figures showing the state of the labor market. Investors will focus on the nonfarm payrolls report, which is due on Friday. An unexpected increase in job growth would indicate a resilient sector, supporting the case for few rate cuts this year. On the other hand, softness in the labor market could increase rate-cut expectations, weaken the dollar and boost currency futures.
Market participants will also monitor political developments in Canada, focus on Canada’s employment figures and examine Australia’s inflation report.
