US Dollar Tumbles Over Trade War Concerns
The US dollar fell against its major rivals last week due to concerns over a possible trade war with China. On Thursday 22 March 2018, US President Donald Trump disclosed plans to levy import tariffs that could affect as much as $60 billion in Chinese goods. The Chinese government retaliated by announcing reciprocal tariffs on $3 billion in US imports. The concerns are widespread, as increased protectionism could have a significant negative impact on global recovery and growth.
The euro initially slid versus the greenback; but climbed later in the week on US dollar weakness. During the week, the Euro gained 0.5% against the dollar.
The Federal Reserve raised interest rates to a range of 1.5% to 1.75%. Sales of existing houses in the US rose 3% to an annual rate of 5.54 million in February, versus 5.38 million in January. Sales of new houses slipped 0.6% to an annual rate of 618,000 in February, as compared to January’s 622,000. The nation’s current account deficit widened to $128.2 billion in the fourth quarter, from $101.5 billion in the previous quarter, and was higher than market expectations of a $125 billion gap.
Initial jobless claims increased to 229,000 in the week ended March 17, versus 226,000 in the prior week, and was worse than market estimates of 225,000. The IHS Markit manufacturing Purchasing Managers Index (PMI) rose to 55.7 in March, from 55.3 in February, exceeding market estimates of 55.5. The IHS Markit services PMI slipped to 54.1 in March from a six-month high of 55.9 in February. US durable goods orders increased 3.1% in February, versus a revised 3.5% decline in January, and significantly exceeded expectations of a 1.5% rise.
Eurozone consumer confidence index remained unchanged at 0.1 in March. The ZEW economic sentiment index fell sharply to 13.4 in March, from 29.3 in February, missing expectations by a wide gap. Eurozone construction output increased 3.7% year-over-year in January, versus a revised 1.4% rise in the previous month. The Eurozone reported a trade surplus of €3.3 billion for January, versus a €1.4 billion trade deficit in the year-ago period. The IHS Markit composite PMI fell to 55.3 in March, missing market estimates of 56.7. The manufacturing PMI declined to 56.6 for March, from 58.6 in February.
German producer prices increased 1.8% year-over-year in February, following a 2.1% rise in the prior month. The IHS Markit services PMI slipped to 54.2 in March, versus 55.3 in February. The ZEW economic sentiment index for Germany slipped to 5.1 for March, versus market estimates of 13.1.
The IHS Markit French Composite PMI declined to 56.2 in March, versus 57.3 in February. Italy’s current account deficit widened to €1.27 billion for January, from a €0.82 billion deficit in the year-ago period. Spanish producer prices increased 1.3% year-over-year in February.
The British pound surged versus the US dollar during the week, with investors expecting the Bank of England to lift interest rates in late spring or early summer. The sterling rose 1.4% versus the greenback this week. Britain and the European Union (EU) reached a deal on a post-Brexit transition period. The UK’s unemployment rate declined to 4.3% in the three months ended January, versus 4.4% in the three months to December. UK producer prices rose 2.6% year-over-year in February, versus a 2.8% rise in January. Inflation in the UK fell to 2.7% in February, from 3% the prior month. UK retail sales rose 0.8% in February, versus a revised 0.2% decline in January.
The US dollar tried to move higher versus the Japanese yen; but fell after tariff announcements by the US President. During the week, the Japanese yen climbed 1.1% versus the greenback.
Japan recorded a trade surplus of ¥3 billion in February, exceeding market expectations of a ¥100 billion deficit. The Nikkei Japan Flash manufacturing PMI fell to 53.2 in March, from a final reading of 54.1 in February and versus market expectations of 54.3. Consumer prices rose at the highest rate since March 2015, up 1.5% year-over-year in February.
Australia’s unemployment rate rose to 5.6% in February, from 5.5% in the previous month. The Westpac-Melbourne Institute Leading Economic Index rose 0.29% in January.
The Canadian dollar climbed versus the US dollar. Canada’s retail sales rose 0.3% in January, versus a decline of 0.7 in December. Inflation rose to 2.2% in February, versus 1.7% the previous month. The greenback declined 1.7% against the Canadian dollar on the week.
In the upcoming trading week, we see a number of high impact economic events, with the GDP growth data for the final quarter of 2017 headlining. Key economic reports from the US include pending home sales, S&P/Case-Shiller home price, consumer spending, PCE price index, Michigan consumer sentiment, Chicago PMI and US international trade in goods data.
The UK will release reports on GDP growth, current account and Gfk consumer confidence. Economic releases from Europe include its inflation report for March. Investors will also look forward to Germany’s jobless rate and Gfk consumer confidence reports; consumer sentiment and GDP growth data from France; and business and consumer morale data from Italy.
Japan will issue reports on industrial production, unemployment, retail trade and housing starts, while Australia will release data on private sector credit and HIA new home sales.
The Euro fell against the US dollar on weak economic data from the Eurozone, bullishness surrounding the US economy and an expected interest rate hike by the Fed. The greenback more than gave up its gains later in the week on escalating tensions around the US-China tariff announcements. The pair remained rangebound around the 1.2300 level for the fourth consecutive week. Trading would likely remain choppy in the upcoming week. The euro could gain momentum towards the latter part of the week.