- Safe-haven currencies and the euro led last week’s rally.
- Market participants sought safety as the trade war between China and the US escalated.
- US consumer inflation fell by 0.1%, while economists had expected a 0.1% increase.
Currency futures gained on Friday as the dollar ended the week lower amid recession worries and a loss in its safe-haven appeal. Trump’s tariff moves during the week escalated the trade wars between China and the US. At the same time, the on-and-off tariff moves hurt investor confidence in the US administration.
Dollar index (Source: Bloomberg)
Safe-haven currencies and the euro led last week’s rally as Trump’s policy decisions plunged the dollar. Traders started panicking when the US president announced a reciprocal tariff on almost all countries that trade with the US. The move was more aggressive than expected, sending investors scrambling for safety. Meanwhile, analysts were predicting a higher likelihood of a US recession.
However, Trump shocked markets more when he announced a 90-day pause on most of these reciprocal tariffs. Most were left uncertain about the administration’s plans. Meanwhile, some analysts said the tariffs were more of a negotiation tactic.
However, the damage was done. Most investors had already sold off US assets after Trump’s tariff announcement. Therefore, although the pause brought brief relief, it highlighted Trump’s wild and unpredictable policy moves. Investor confidence dropped significantly, with most preferring other markets like the Eurozone. As a result, the dollar lost its safe-haven appeal while the euro rose to a three-year high.
Furthermore, market participants sought safety as the trade war between China and the US escalated. By Friday, the US had hiked duties on Chinese imports to 145%. Meanwhile, China hiked those on US imports to 125%.
The war will hurt many major US companies that rely on imports from China. Consequently, analysts are forecasting a looming US recession, putting pressure on the dollar. On the other hand, safe-haven currencies like the yen and the Swiss franc soared to new peaks.
Further downward pressure on the greenback came from a set of downbeat US inflation figures. Data last week revealed that consumer inflation fell by 0.1%, while economists had expected a 0.1% increase. Moreover, wholesale inflation declined by 0.4% compared to estimates of a 0.2% increase. The downbeat figures put pressure on the Fed to lower borrowing costs. At the same time, consumer sentiment data showed a big drop in confidence in the economy. However, inflation expectations soared, showing a high chance of stagflation.
