Last Friday, the dollar recorded a weekly decline against the euro, impacted by U.S. President Trump's delay in implementing trade tariff plans, optimism over a Russia-Ukraine peace agreement, and increasing expectations of a Federal Reserve rate cut, driving the dollar index to a nine-week low.
The Dollar Weakens, Euro Climbs
The dollar index fell 0.35% to close at 106.72, with an intraday low of 106.56, the lowest level since December 12, marking a 1.3% weekly decline. The euro rose 0.32% against the dollar, quoted at $1.0497, reaching an intraday high of $1.0514, the highest since January 27, with an expected weekly gain of 1.7%. Additionally, the yen rose 0.37% against the dollar to reach 152.22 yen.
Expectations of a Federal Reserve rate cut have intensified, putting further pressure on the dollar. Recent data shows U.S. January retail sales fell more than expected, prompting traders to bet on two Fed rate cuts this year. Futures market data suggests the Fed may cut rates by 41 basis points within the year, reversing last week's downtrend in rate cut expectations following higher-than-expected consumer price data.
Trade Policies and Market Impact
On Thursday, Trump instructed his economic team to explore reciprocal tariffs on countries exporting to the U.S. with tariffs, aiming to complete the study by April 1. White House officials stated this move is intended to initiate negotiations with other countries, with the potential for the U.S. to adjust its policies if other countries lower tariffs. Meanwhile, U.S. Treasury Secretary Besent revealed that in addition to assessing tariff measures, the Trump administration is also examining non-tariff barriers and currency manipulation.
Analysts suggest that trade policy uncertainties could heighten market volatility. Tariffs might lead to increased inflation pressures, extending the Fed's need to maintain high interest rates, providing some support for the dollar. However, the market broadly anticipates that if the Fed ultimately shifts to rate cuts, the dollar will still face downward pressure.
Russia-Ukraine Situation Boosts Market Sentiment
Last Wednesday, Trump spoke with Russian President Putin and Ukrainian President Zelensky, discussing issues related to the Ukraine war. The market widely believes that if a peace agreement is reached between Russia and Ukraine, the eurozone economy will benefit, strengthening the euro. This optimistic sentiment led to strong performances by the euro and other European currencies last week.
Additionally, last Thursday, the U.S. released the January Producer Price Index (PPI) report, indicating that inflation might be milder than market expectations, suggesting the upcoming Core Personal Consumption Expenditures (PCE) Price Index might be lower than previously anticipated. The PCE index is a key metric for the Fed's inflation assessment, and if this data further slows, it will strengthen market expectations for Fed rate cuts within the year.
In summary, the dollar has weakened due to multiple factors, including postponed trade policy implementations, improved prospects for Russia-Ukraine peace, and heightened expectations of Federal Reserve rate cuts, while the euro strengthens on optimistic forecasts for the European economy. The market will continue to closely monitor the Fed's policy directions and the latest developments in global trade dynamics.
