- The dollar lost its appeal as market participants worried about the impact of Trump’s tariffs.
- The US core PCE price index increased by 0.4% compared to estimates of 0.3%.
- Most traders who dumped the dollar rushed to the yen.
Currency futures gained on Friday and extended the moves on Monday as the dollar collapsed amid fears of stagflation. Market participants worried that more US tariffs would weaken economic growth and boost inflation. At the same time, data on Friday revealed an unexpected surge in US underlying inflation.
On Friday, a decline in the US dollar bolstered the majority of currency futures. The dollar lost its appeal as market participants worried about the impact of Trump’s tariffs on the US economy. Experts are predicting a period of poor growth and high inflation. The US president plans to introduce new tariffs on cars this week, along with reciprocal tariffs on many trading partners. Additionally, investors expect a 25% blanket tariff on imports from Canada and Mexico.
These tariffs will escalate the global trade war and negatively impact many economies, including the US. At the same time, prices of goods will increase, putting upward pressure on inflation. This would result in a period of stagflation.
Moreover, data on Friday revealed that the core PCE price index increased by 0.4% compared to estimates of 0.3%. The report further fueled fears of stagflation in the US, weighing on the dollar. A separate report revealed that consumer inflation expectations soared to a two-and-a-half-year high.
Although most currency futures rose on Friday, the yen outperformed its peers. Japan’s currency is considered a haven during times of uncertainty, so most traders who dumped the dollar rushed to the yen. On Friday, data revealed that Japan’s inflation accelerated in March, increasing expectations for rate hikes by the Bank of Japan.
Meanwhile, the Canadian dollar was an outlier, weakening against the dollar despite upbeat local data. The loonie’s appeal fell ahead of a likely 25% tariff on Canadian imports to the US. If Trump implements these tariffs, Canada’s economy will suffer greatly. Therefore, the Bank of Canada would be forced to cut rates further to support growth. However, this might be difficult if a trade war boosts inflation.
Euro-Dollar price (Source: Bloomberg)
Meanwhile, in the Eurozone, data revealed weaker-than-expected inflation in France and pain. As a result, European Central Bank rate cut expectations increased. Nevertheless, the euro gained due to the dollar’s weakness. Moreover, it has gained since Trump took office.
