Market Volatility Ahead: Dollar Strengthens Amid Tariff Threats
As the world braces for the implementation of President Donald Trump’s tariff threats, the US dollar has strengthened against major currencies, including the yen and euro. This move comes ahead of Saturday’s deadline, when the US is set to impose 25% tariffs on imports from Mexico and Canada if the two countries fail to address the flow of illegal migrants and the drug fentanyl into US territory.
Economic Data Releases: A Mixed Bag
Earlier today, the US Commerce Department released data showing a 0.3% increase in the Personal Consumption Expenditures (PCE) Price Index, the largest rise since last April. This surge in consumer spending suggests the Federal Reserve may not be in a hurry to cut interest rates anytime soon. However, according to John Velis, FX and macro strategist at BNY in New York, the data releases were largely in line with expectations and didn’t cause significant market volatility.
Currency Markets React
The Canadian dollar edged higher, up 0.12%, but still trades near five-year lows versus the greenback at C$1.4477. The Mexican peso, meanwhile, pared losses from the previous session and stood at 20.652 per dollar, up 0.51%. Despite these gains, both currencies are set for a weekly decline, with the Mexican peso facing its worst weekly performance since October.
Central Banks Weigh In
Bank of Japan Governor Kazuo Ueda emphasized the need for loose monetary policy to ensure underlying inflation gradually accelerates toward the 2% target. Data released today showed core inflation in Tokyo hit 2.5%, the fastest annual pace in nearly a year. The dollar strengthened 0.3% to 154.76 against the Japanese yen.
Euro and Swiss Franc Under Pressure
The euro dipped to session lows after data showed German regional inflation slowed more than expected in December. It was last down 0.12% at $1.0378. The European Central Bank cut interest rates on Thursday, leaving the door open for another cut in March, as concerns over lacklustre economic growth supersede worries about persistent inflation.
Dollar Index Rises
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.16% to 108.26. According to Goldman Sachs analysts, even if the Canada and Mexico tariffs are implemented, the market would likely embed some probability that the tariffs would not be permanent.
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