- The dollar rallied as trade tensions between the US and its partners eased.
- The US economy added 177,000 new jobs in April.
- The yen collapsed after the BoJ policy meeting.
Currency futures strengthened against the dollar on Friday but closed well below their daily highs. The move continued at the start of a new week as market participants geared up for the FOMC policy meeting.
Last week, the dollar rallied as trade tensions between the US and its partners eased. Trump took big steps to bring peace with the US’s trade partners. He noted that negotiations were progressing well and that the US would soon sign deals with Japan, India, and South Korea. Moreover, he sounded more optimistic about talks with China.
Reports revealed on Friday that China was evaluating a US offer to meet and talk. After a tense month of increasing tariffs, both countries have adopted a softer stance. The risk of a global recession grows every day the trade war continues. Therefore, any step towards a trade deal boosts risk appetite and strengthens the previously battered dollar.
However, although easing trade tensions supported the dollar, downbeat economic data put a cap on gains. Throughout the week, the US released poor figures on job vacancies, private employment and jobless claims. Even the manufacturing PMI showed further contraction in the sectors. Therefore, by Friday, most believed the NFP report would also be poor. As a result, the dollar pulled back from its highs.
US employment (Source: Bureau of Labor Statistics)
However, the US economy added 177,000 new jobs in April, beating forecasts of a 138,000 increase. Although hourly earnings eased, the unemployment rate was steady at 4.2%. The positive data gave the dollar a brief rally because it lowered expectations for Fed rate cuts this year. After the data, market participants lowered the likelihood of a June rate cut from 58% to 35%. This week, the Fed will likely keep rates unchanged.
However, some experts say it is too early to see the real impact of Trump’s tariffs. They expect poorer data in the coming months that could weaken the greenback.
Elsewhere, the yen collapsed on Thursday after the BoJ kept interest rates unchanged. Moreover, the central bank downgraded its forecasts for growth and inflation, dimming expectations for rate hikes this year.
However, food inflation remains high, and wage growth is strong in Japan. Therefore, if economic data remains strong, the BoJ might consider another hike this year. Meanwhile, market participants expect the BoE to cut rates by 25-bps on Thursday.
