The dollar made a modest rebound on Thursday, supported by a rise in U.S. Treasury yields, as global trade uncertainties continued to create volatility in the markets. However, currencies traded within tight ranges, with investors grappling to assess the impact of a deepening global trade war on U.S. inflation and economic growth.
On Wednesday, U.S. President Donald Trump escalated trade tensions by threatening additional tariffs on European Union goods, prompting retaliatory signals from major U.S. trading partners. The rise in trade concerns, coupled with mounting fears of a U.S. recession, has triggered significant volatility in the foreign exchange market, as traders alternate between relief and anxiety over Trump’s shifting policy stance.
Markets Find Momentary Calm in Early Asian Session
After days of intense market fluctuations, early Asian trading on Thursday brought a brief respite, as investors took a pause from the barrage of headlines regarding U.S. trade policy.
The dollar rose 0.05% against the Japanese yen, reaching 148.31, recovering some of the losses from earlier in the week, when it dropped to a five-month low against the yen. The initial decline had been driven by fears of an impending U.S. recession, which had led to a flight to the Japanese currency as a safe-haven asset.
Similarly, the Swiss franc eased from a three-month high on Monday, last standing at 0.8817 per dollar.
U.S. Inflation Data Shows Mixed Impact
U.S. inflation data released on Wednesday showed a smaller-than-expected rise in consumer prices for February, providing some relief to markets. However, economists cautioned that the reprieve could be short-lived, as the data did not fully capture the potential inflationary effects of Trump’s ongoing tariffs.
James Reilly, senior markets economist at Capital Economics, noted, “What is more uncertain is the outlook for future inflation and the state of U.S. economic activity, thanks largely to the unpredictability of U.S. trade policy.”
Treasury Yields and Dollar Support
Despite concerns about future inflation, U.S. Treasury yields rose, as traders priced in the potential for inflationary pressure down the road. The 10-year yield held steady near a one-week high of 4.3047%, while the two-year yield remained little changed at 3.9866%. These rising yields provided support for the dollar and pushed the euro away from its five-month high, with the single currency last trading at $1.0890.
Sterling ticked up 0.06% to $1.2968, and the dollar index firmed to 103.57, moving away from Tuesday’s five-month low.
Trade Tariffs and Inflation Concerns
The Canadian dollar remained mostly unchanged at C$1.4372 after the Bank of Canada cut its key policy rate by 25 basis points on Wednesday, citing concerns over trade uncertainty and inflationary pressures stemming from Trump’s tariffs.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, pointed out that tariffs could exacerbate inflationary pressures globally, creating a dilemma for central banks. “Tariffs pose inflation pressures to the world economy, which would be a nightmare for central banks,” she said. “Even though central banks can cut interest rates to offset the negative impact on growth, inflation concerns might ultimately limit what they can do on the monetary policy front.”
Commodity Currencies and Economic Outlook
In the commodity currencies, the Australian dollar gained 0.07% to $0.6326, while the New Zealand dollar edged up 0.13% to $0.5738.
As global trade tensions continue to escalate, the outlook for inflation and economic growth remains highly uncertain, keeping markets on edge and central banks cautious in their policy responses.
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