- Currencies ended last week down as the dollar gained over 1.6% on the Trump trade.
- The euro collapsed to a one-year low as investors feared looming tariffs.
- Markets are pricing a 54% chance that the BoJ will hike in December.
Currency futures held steady on Monday as the dollar traded near a one-year high. Most currencies ended last week down, as the dollar gained over 1.6% on the Trump trade. Meanwhile, mixed US data had little impact on market sentiment.
Currency futures had a rough week as markets continued to price the impacts of Trump’s policy proposals. A Trump presidency is bullish for the dollar because his policy changes will likely increase inflation and boost economic performance. Meanwhile, other currencies might suffer significantly due to these policies.
Notably, the euro collapsed to a one-year low as investors feared looming tariffs on Eurozone goods. Trump has threatened to impose tariffs on cars imported from the region, which would significantly hurt the economy. At the same time, tariffs on Chinese goods will hurt the economy of one of the Eurozone’s biggest trading partners.
Meanwhile, the yen dropped as the outlook for US monetary policy changed, meaning the rate gap between Japan and the US might remain longer. Initially, the yen had found relief as the Federal Reserve started lowering borrowing costs in September.
Moreover, at the time, markets were pricing an aggressive rate-cutting cycle. However, all this changed when Trump won the election. Experts now expect a spike in US inflation, which will likely pause the Fed’s rate cuts. Consequently, the yen is in a vulnerable position and might witness more declines.
Top Japanese officials have warned against sharp declines. At the same time, Bank of Japan governor Kazuo Ueda said on Monday that the central bank might hike rates if the economy performs as expected. A shift to a more hawkish tone might support the yen. Markets are pricing a 54% chance that the central bank will hike in December.
US retail sales (Source Census Bureau, Bloomberg)
US economic data failed to draw investors’ attention away from the Trump trade. Retail sales jumped by 0.4% in October. However, core sales came in below estimates. Meanwhile, consumer inflation aligned with expectations, keeping rate-cut bets unchanged.
Furthermore, Fed policymakers assumed a more hawkish tone last week. Powell noted that there was no rush to lower borrowing costs. These and more remarks weighed on currency futures and boosted the dollar.
