Dollar Bounces Back with Rising Yields, Trade War Fears Persist

Image Credit: Reuters

The dollar saw a slight rebound on Thursday, boosted by rising U.S. Treasury yields, although currencies remained in narrow ranges as investors weighed the potential effects of an escalating global trade war on U.S. inflation and economic growth.

On Wednesday, U.S. President Donald Trump threatened to impose additional tariffs on European Union goods, prompting retaliation from key U.S. trading partners already affected by existing trade barriers. These rising global trade tensions, coupled with concerns over a possible U.S. recession, have caused significant volatility in global markets, as traders swing between optimism and anxiety over Trump’s unpredictable policy shifts.

However, markets calmed somewhat during the early Asian trading session on Thursday, offering investors a temporary break from the constant news flow surrounding U.S. trade policies.

The dollar gained 0.05% against the yen, reaching 148.31, recovering some of the losses from earlier in the week when it hit a five-month low against the Japanese currency due to fears of a U.S. economic downturn driving demand for the yen as a safe haven.

The Swiss franc also pulled back from its three-month high of Monday, standing at 0.8817 per dollar.

U.S. inflation data released on Wednesday showed a smaller-than-expected rise in February, providing some relief. However, this might be short-lived as the data did not fully account for the impact of Trump’s tariffs.

James Reilly, senior economist at Capital Economics, noted that the outlook for future inflation and U.S. economic activity remains uncertain, largely due to the unpredictability of U.S. trade policies. "These factors are driving market movements, and the report didn’t offer much new insight," he said.

U.S. Treasury yields climbed, as traders anticipated potential future inflation, with the 10-year yield stabilizing around a one-week high of 4.3047%. The two-year yield remained nearly unchanged at 3.9866%. This helped support the dollar and pushed the euro down from its five-month high on Tuesday, with the single currency trading at $1.0890.

The British pound rose 0.06% to $1.2968, while the dollar index recovered from its five-month low on Tuesday, firming at 103.57.

The Canadian dollar was little changed at C$1.4372. The Bank of Canada cut its key policy rate by 25 basis points on Wednesday, expressing concern over inflationary pressures and slower growth due to trade uncertainty and Trump’s tariffs.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, commented, “Tariffs put inflationary pressure on the global economy, which is a headache for central banks. They are adopting a more cautious approach, keeping an open mind about what lies ahead.”

She added, “Though central banks can lower interest rates to counteract the negative effects on growth, inflation concerns may ultimately limit their ability to adjust monetary policy.”

In other currency movements, the Australian dollar rose 0.07% to $0.6326, and the New Zealand dollar increased 0.13% to $0.5738.

 

 

 

 

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