SINGAPORE: The US Dollar (USD) struggled for traction on Thursday as investors worried about the impact of an escalating global trade war on U.S. inflation and growth, while the yen ticked higher on favourable domestic conditions for more policy tightening.
A rise in global trade tensions and worries over U.S. recession risks have rattled global markets and sparked huge volatility in currencies, as traders seesaw between relief and angst over U.S. President Donald Trump’s whip-saw policy changes.
Markets were a tad calmer in the Asian session on Thursday as investors caught a break from the flurry of headlines about U.S. trade policy, shifting focus to developments in Japan.
The yen was among the top gainers against a weaker dollar, rising 0.3% to 147.75, following Bank of Japan (BOJ) Governor Kazuo Ueda’s comments reaffirming the bank’s resolve to shrink its “too big” balance sheet.
While the BOJ is expected to leave rates unchanged at next week’s policy meeting, over two-thirds of economists polled by Reuters expect a rise of 25 basis points to 0.75% in the third quarter, most likely in July.
“The BOJ is likely to hike at least twice more this year, but we are tilting to three,” said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income.
“Not only is the BOJ more confident about wages being strong this year, but growth is likely to also remain nimble for further hikes.”
Separately, a major Japanese labour union group said its members had struck agreements for hefty wage hikes with employers for a third consecutive year.
Many of Japan’s biggest companies, from tech conglomerates to Toyota, have met union demands for wage increases.
Currencies elsewhere traded in tight ranges as investors remained on edge over escalating trade tensions.
Trump threatened further tariffs on European Union goods on Wednesday as major U.S. trading partners said they would retaliate against the tariffs imposed so far.
The Swiss franc was buoyed by safety bids and hovered near a three-month high at 0.8815 per dollar.
The euro and sterling �t;GBP=D3 ⪐ similarly held near their recent multi-month highs, and were last bought at $1.0880 and $1.2955, respectively.
The euro has drawn additional support from Germany’s fiscal, opens new tab reset plan, while the pound has been a beneficiary of Britain’s more pragmatic approach to Trump’s tariffs.
The Australian and New Zealand dollars, meanwhile, came under pressure amid fragile risk appetite, with the former falling 0.35% to $0.6299 while the latter eased 0.33% to $0.5712.
Against a basket of currencies, the dollar stood at 103.57, close to a five-month low.
U.S. inflation rose slightly less than expected in February, but the relief it offers could be temporary as the data did not fully capture the cascade of Trump’s tariffs.
“What is more uncertain is the outlook for future inflation and the state of U.S. economic activity, thanks largely to the unpredictability of U.S. trade policy,” said James Reilly, senior markets economist at Capital Economics.
“It is these issues driving markets, and (the) report gave little fresh insight into either of those.”
Analysts say uncertainty over U.S. trade policy is also muddying the outlook for global central banks, as policymakers look to strike a delicate balance between supporting economic growth and taming a potential resurgence in inflation.
The Canadian dollar was last 0.2% weaker at 1.4398 per dollar, after the Bank of Canada trimmed its key policy rate by 25 basis points on Wednesday.
“Central bankers are just being more cautious and keeping an open mind to what’s to come,” Carol Kong, a currency strategist at Commonwealth Bank of Australia, said.
“Even though central banks can cut interest rates to offset the negative impact on growth, inflation concerns might ultimately limit what they can do on the monetary policy front.”
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