The dollar saw a slight increase, supported by rising U.S. Treasury yields, but escalating global trade tensions have triggered market risk aversion, with investors continuing to assess economic prospects.
Dollar Fluctuates, Market Sentiment Divided
Overnight, the dollar edged higher as the yield on U.S. Treasury bonds rose, with the 10-year Treasury yield climbing to 4.3047%, nearing a one-week high. However, the market remains largely in a wait-and-see mode, as investors continually adjust between risk appetite and safe-haven demand.
Affected by global trade uncertainties, the dollar rose slightly against the yen by 0.05% to 148.31, recovering some ground. Previously, due to uncertainty in the U.S. economic outlook, the yen had been pushed to a five-month high due to safe-haven demand. The euro, on the other hand, fell from its five-month high against the dollar reached on Tuesday.
James Reilly, Senior Market Economist at Capital Economics, stated: “Market sentiment is swinging between risk aversion and risk appetite, with investors still searching for direction.”
Intensifying Trade Frictions, Rising Market Risk Aversion
On Wednesday, President Trump threatened to impose a new round of tariffs on EU goods, exacerbating global trade tensions. Meanwhile, major U.S. trading partners expressed intentions to take retaliatory actions, further increasing market volatility.
Carol Kong, Foreign Exchange Strategist at Commonwealth Bank of Australia, pointed out: “Tariff policies may drive up global inflation, posing challenges to central banks worldwide.” The Bank of Canada also warned that trade uncertainties and tariff measures might weaken economic growth and trigger inflationary pressures, limiting the room for central bank policy actions.
Inflation Data Below Expectations, Fed Policy in Focus
February's U.S. inflation data fell short of market expectations, with the annual CPI rate at 2.8%, marking the lowest level since November last year. Despite this, the market still anticipates potential inflationary pressures in the future that could drive Treasury yields higher, providing support for the dollar.
The Federal Reserve is set to hold a policy meeting next week, with a general market expectation of maintaining interest rates unchanged. However, if trade friction intensifies and global economic uncertainties increase, central banks around the world might have to adjust policies to address inflation pressures, which could further impact the dollar's movement.
Outlook: Short-Term Support for Dollar, Medium-Term Outlook Uncertain
The current foreign exchange market is influenced by both global trade policy uncertainties and changes in Treasury yields, suggesting that the dollar may still have some support in the short term. However, if trade tensions continue to escalate, market risk aversion may intensify, possibly strengthening safe-haven currencies like the yen and the Swiss franc.
From a technical perspective, the dollar index has yet to see a substantial rebound after briefly halting its decline; the medium-term downtrend remains unchanged, with the possibility of another decline following a short-term rally. The market should closely monitor developments in Federal Reserve policies, trade situations, and global inflation trends to assess the future trajectory of the dollar.
