The U.S. dollar experienced a slight rebound on Thursday, driven by a rise in U.S. Treasury yields. However, currencies remained within tight ranges as investors weighed the impact of escalating global trade tensions on U.S. inflation and economic growth.
Rising Global Trade Tensions
U.S. President Donald Trump escalated trade tensions on Wednesday, threatening further tariffs on European Union goods. This move came as major U.S. trading partners, including the EU, warned of retaliation against the trade barriers already imposed by Trump.
The growing trade conflict and concerns over a potential U.S. recession have created significant volatility in global markets. Traders are grappling with mixed sentiments as they react to frequent changes in U.S. trade policy, swinging between relief and anxiety.
Markets showed some stability in the early Asian session on Thursday, providing a brief respite from the continuous flow of trade policy headlines.
Currency Market Movements
The dollar gained 0.05% against the Japanese yen, reaching 148.31. This recovery followed a decline earlier in the week, where the dollar hit a five-month low against the yen. The drop was driven by fears of an economic downturn in the U.S., prompting investors to flock to the Japanese yen as a safe haven.
The Swiss franc also retreated slightly from its three-month peak reached on Monday, last standing at 0.8817 per dollar.
U.S. Inflation Data and Market Reactions
U.S. inflation data released on Wednesday showed a smaller-than-expected increase in February, offering some relief to markets. However, this relief may be short-lived as the data did not fully account for the effects of Trump’s tariffs.
James Reilly, senior markets economist at Capital Economics, noted that the future outlook for inflation and U.S. economic activity remains uncertain, primarily due to the unpredictability of U.S. trade policies. Reilly stated, “It is these issues driving markets, and the report gave little fresh insight into either of those.”
Treasury Yields and Dollar Strength
U.S. Treasury yields rose as traders anticipated a potential increase in inflation in the future. The benchmark 10-year yield steadied near a one-week high at 4.3047%, while the two-year yield remained largely unchanged at 3.9866%. This upward movement in yields supported the dollar and pressured the euro, which fell from Tuesday’s five-month high to $1.0890.
Sterling rose 0.06% to $1.2968, while the dollar index edged up from Tuesday’s five-month low to 103.57. The Canadian dollar remained little changed at C$1.4372.
Central Bank Concerns Over Trade Policy
The Bank of Canada made a policy change on Wednesday, cutting its key interest rate by 25 basis points. The bank also expressed concerns about inflationary pressures and weaker growth resulting from trade uncertainty and Trump’s tariffs.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, warned that tariffs could create inflationary pressures for the global economy, which would be problematic for central banks. She said, “Central bankers are just being more cautious and keeping an open mind to what’s to come.”
While central banks may cut interest rates to mitigate the impact on growth, Kong noted that inflation concerns could limit their ability to adjust monetary policies effectively.
Other Currency Movements
The Australian dollar rose 0.07% to $0.6326, while the New Zealand dollar increased 0.13% to $0.5738. These modest gains came as traders continued to monitor global trade developments and their potential effects on the foreign exchange market.
The dollar’s slight recovery, bolstered by rising Treasury yields, indicates that investors are still navigating the uncertainty created by ongoing trade tensions and U.S. economic concerns.
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