U.S. Dollar Faces Correction on Sour Sentiments
U.S. dollar is facing a correction in the forex markets amid what analysts call souring sentiment, driven by softer economic data and a potential US-China trade deal.
The dollar has given up all its gains for the week as soft data and US earnings seem to be casting doubts on the notion of US exceptionalism, ING said in a Friday note.
In the forex market, the Japanese yen emerged as the big winner, boosted by hawkish inflation data overnight. But the US dollar rebounded against its major trading partners early Friday, ahead of S&P Global’s flash purchasing managers’ index estimates for February.
Short-term USD swap rates are modestly lower over the past couple of sessions but still fail to fully price in two cuts from the Federal Reserve this year, despite the softening economic narrative.
A quick summary of foreign exchange activity heading into Friday showed USDEUR fell to 1.0467 from 1.0503 at Thursday’s US close but remained above 1.0441 at the same time.
Eurozone manufacturing PMI rose more than expected in February but still indicates contraction, while services PMI unexpectedly declined, suggesting slower growth, according to data released earlier Friday.
GBPUSD fell to 1.2641 from 1.2670 at Thursday’s US close but was above 1.2614 at the same Thursday morning. UK retail sales rose more than expected in January, but the year-over-year rates slowed, according to data released overnight.
UK manufacturing PMI fell further below the breakeven point in February, while services PMI rose, indicating faster expansion. The next Bank of England meeting is scheduled for March 20.
USDJPY rose to 150.3777 from 149.6782 at the Thursday US close and 150.0560 at the same time Thursday morning.
Japanese consumer price growth accelerated in January, while Japanese manufacturing and services PMI both increased in February, according to data released overnight. The next Bank of Japan meeting is scheduled for March 18-19.
USDCAD rose to 1.4194 from 1.4174 but was below 1.4218 at the same time Thursday morning. “FX markets moved quite hectically yesterday, with the dollar giving up its weekly gains in a round of heavy positioning readjustment,” ING said.
Analysts noted a mix of triggers for the dollar correction: US President Donald Trump raised the prospect of a US-China trade deal.
Also, US data came in softer than expected, US equities underperformed again after disappointing Walmart earnings, and the US curve flattened on the back of Treasury Secretary Scott Bessent’s recent comments.
Trump’s trade comments are being weighed more carefully now. Bessent will hold a first call with Chinese officials today. Direct communication with trading partners has so far led to some constructive comments by the new US administration.
“…so we could easily see some more positive headlines on the topic today. But unlike the quickly drafted deals on border security with Canada and Mexico, China’s tariffs appear instrumental to longer-term plans from the US to bring down the trade deficit, and trade negotiations should involve more twists and turns”, ING said. # Oil Rises, Gas at 2-Year High as Supply Risks Heighten
