- The US dollar strengthened as trade tensions between China and the US eased.
- US business activity declined in March.
- This week, traders will be watching the US nonfarm payrolls.
Currency futures extended last week’s decline as the dollar ended its first week of gains in a while. The US dollar strengthened as trade tensions between China and the US began to fade. As a result, risk appetite improved, and demand for safe-haven currencies, such as the yen and the Swiss franc, decreased.
At the start of last week, the dollar collapsed as investor confidence plunged with Trump’s attack on the Fed. News that the White House was exploring ways to fire Fed Chair Powell raised concerns about the Fed’s independence.
Trump was angry with the Fed Chair for taking too long to cut interest rates. According to the US president, the economy required immediate support. Meanwhile, Powell is waiting for concrete evidence that the economy needs lower borrowing costs.
Nevertheless, calm returned to markets when Trump retracted his comments and stated that he had no intention of removing Powell from office. As a result, sentiment improved, and the dollar found support.
Dollar index (Source: Bloomberg)
Tariff comments from the US further supported the dollar’s rebound. The Treasury Secretary noted that the trade war between China and the US was unsustainable. Therefore, tariffs needed to come down.
Moreover, Trump said he was ready to lower rates on China and start talks. Meanwhile, China exempted some US goods from the 125% tariff. The moves rekindled hopes of a deal to end the ongoing trade war. Such an outcome would boost risk appetite and improve the outlook for both economies.
Meanwhile, market participants paid attention to the US PMI report. Business activity declined in March, supporting predictions of a slowdown in the economy. Service sector business activity eased, overshadowing the improvement in the manufacturing sector.
This week, traders will watch the US nonfarm payrolls, which might paint a picture of the economy after Trump’s tariffs. A downbeat report will increase pressure on the Fed to cut rates. On the other hand, positive numbers will ease recession worries.
Market participants will also focus on the Bank of Japan policy meeting. Experts believe the central bank will keep rates unchanged. Nevertheless, they might remain hawkish about inflation and wage growth.
The euro dropped as market participants priced another ECB rate cut in June. Policymakers expect weaker growth due to Trump’s tariffs. Therefore, borrowing costs may continue to drop.
