CAPITALDIGEST MARKET REVIEW, 02/06/2025

EURO LOGS ONE-MONTH HIGH AFTER TRUMP DELAYS EU TARIFFS

The euro hit a one-month high against the U.S. dollar on Monday after U.S. President Donald Trumpbacked down from threatened 50% duties on European Union shipments from June 1, as the bloc asked for time to “reach a good deal”. The dollar continued its decline against a broad spectrum of other currencies as Trump’s policy reversals, as well as the sweeping spending and tax-cut bill, turned investors away from U.S. assets. “The ‘Sell America’ theme, which obviously was the dominant theme back in April, is back on show,” said Ray Attrill, head of FX research at National Australia Bank. “Markets have probably taken the view – and probably rightly so – that where we land eventually on a tariff situation between the U.S. and the EU is not going to be at 50%, but how we get there is frankly anybody’s guess at the moment.” The euro climbed as much as 0.55% to reach $1.1418 for the first time since April 29. It was last up 0.17% on the day at $1.1375, bringing gains for the year so far to 10%. Much of the dollar’s decline in the past couple of months has been to the benefit of the euro, as investors have targeted a range of non-U.S. markets. The single currency could become a viable alternative to the dollar, the world’s reserve currency, if governments can strengthen the bloc’s financial and security architecture, European Central Bank President Christine Lagarde said on Monday. “The ongoing changes create the opening for a ‘global euro moment,'” Lagarde said at a lecture in Berlin. “The euro will not gain influence by default – it will have to earn it.

DOLLAR GAINS ON TRADE OPTIMISM, YEN SLIPS

The U.S. dollar was boosted for a second day on Wednesday on optimism that trade deals will brighten the U.S. economic outlook, while the Japanese yen was weaker after the government saw soft demand for 40-year bonds.Pessimism over the U.S. economy has declined after President Donald Trump delayed on the weekend a plan to impose 50% tariffs on European Union imports and following a deal with China earlier this month to reduce tariffs imposed on each other. “The weekend’s quick reversal of tariff threats against Europe has bolstered risk appetite and reduced negative perceptions of the U.S. growth trajectory, and so that’s boosting the dollar,” said Karl Schamotta, chief market strategist at Corpay. Investors are also focused on Nvidia’s (NVDA.O), opens new tab earnings due after Wednesday’s stock market close, which are likely to influence risk sentiment. A strong result would likely boost the U.S. currency, said Schamotta. The dollar had little reaction to minutes from the Federal Reserve’s May 6-7 meeting released on Wednesday. Fed officials acknowledged they could face “difficult tradeoffs” in coming months in the form of rising inflation alongside rising unemployment, an outlook buttressed by Fed staff projections of increased risks of a recession.

STERLING STEADY AGAINST THE DOLLAR AS ECONOMIC DATA, TRADE DEALS OFFER SUPPORT

Sterling was steady against the dollar on Wednesday, hovering near Monday’s three-year high, as it continued to be supported by favourable economic data last week as well as Britain’s recent trade deals. Investors also looked towards a multi-year spending review by finance minister Rachel Reeves in two weeks which will set the budgets for public services. Sterling was little changed at $1.3511 but stayed close to the three-year high of $1.3593 it touched on Monday Sterling was little changed at $1.3511 but stayed close to the three-year high of $1.3593 it touched on Monday It was little changed against the euro, with the euro broadly flat at 83.86 pence in its seventh week of losses against the pound. “Sterling’s done pretty well recently,” Rabobank strategist Jane Foley said, pointing to stronger-than-expected inflation and slightly stronger retail sales data last week and trade deals that Britain struck with both India and the U.S. as reasons for the currency’s resilience. However, the spending review is pushing attention back onto the challenges that Reeves faces around the fiscal situation in the country, Foley said, as the government, which had pledged not to increase taxes and keep spending tight while still fuelling economic growth, seems to be prepared to pour more money into defence and health, among other issues.

DOLLAR MIXED ON TARIFF UNCERTAINTY, HEADED FOR MONTHLY GAIN AGAINST YEN

The dollar was mixed on Friday but on track for the first monthly gain against the Japanese yen this year as investors factored in the likelihood of trade tariffs remaining in some form, even as U.S. President Donald Trump faces a court battle over his authority to impose them. A federal appeals court temporarily reinstated the most sweeping of Trump’s tariffs on Thursday, a day after a U.S. trade court ruled that Trump had exceeded his authority in imposing the duties and ordered an immediate block on them. While the exact level of tariffs that will remain on trading partners is unknown, traders expect the levies to persist in some form. “We’re going to have some tariffing. Maybe not as exciting as was announced on April the 2nd, but we’re still going to get it,” said Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank NY Branch. “The one thing that the court ruling may have done is limited the amount of shocks that Trump can unleash with a headline or with a comment at a press conference,” Englander said. White House trade adviser Peter Navarro said on Thursday that the Trump administration will seek to enact tariffs through other means if it ultimately loses the court fights over its trade policy.

STERLING SET FOR FOURTH MONTHLY RISE AGAINST A WEAKENED DOLLAR

Sterling held steady on Friday, set for its fourth month in a row of gains against the dollar, as recent favourable economic data support Britain’s currency just as worries over U.S. tariffs and high debt weigh on the greenback.”Sterling looks well supported,” said Kit Juckes, chief FX strategist at Societe Generale, pointing to “reasonably good” data trends. Sterling was last trading at $1.3472 , little changed on the day and down around 0.5% on the week after gaining about 2% last week.That leaves the pound set to end May with a gain of around 1%, which would mark a fourth straight month of increases against a weakened greenback. It last recorded four consecutive monthly gains against the dollar in 2022. The dollar, meanwhile, was en route to its fifth-straight monthly decline on Friday, as further uncertainty around trade policy and U.S. fiscal health weighed. Sterling rose around 0.25% to 84.06 pence per euro. Still, it was set for its first week of declines after six weeks of increases as gains seen after UK retail sales and inflation numbers last week and optimism around Britain’s trade deals with the U.S. and India faded.