CAPITALDIGEST MARKET REVIEW, 17/03/2025

DOLLAR HOBBLED BY ECONOMIC WORRIES; YUAN GAINS ON STIMULUS

The U.S. dollar hovered close to a five-month low against its major peers on Monday, pressured by President Donald Trump’s erratic trade policies and a run of soft macroeconomic data. The euro stood not far from a five-month peak after German parties on Friday agreed on a fiscal deal that could boost defence spending and revive growth in Europe’s largest economy. Get the latest news and expert analysis about the state of the global economy with the Reuters Econ World newsletter. Sign up here. There have been “two stark shifts in macro markets” over the past month, according to Goldman Sachs analysts Dominic Wilson and Kamakshya Trivedi. The first is a “sharp re-rating lower” of U.S. assets “on the back of tariff volatility and the environment of broader policy uncertainty created by the new administration”, while the second is a “sharp re-rating higher in the fiscal impulse in Germany”, the analysts wrote in a note to clients. “Together, these two shifts pose a significant challenge to the narrative of U.S. exceptionalism that has been a dominant market theme,” they said. The euro was fetching $1.0879, slightly off the $1.0947 level it hit last Tuesday for the first time since October 11.

CANADIAN DOLLAR POSTS WEEKLY GAIN AS EQUITIES REBOUND

 The Canadian dollar strengthened against its U.S. counterpart on Friday as equity markets rebounded and Mark Carney was sworn in as the country’s prime minister, with the currency notching its second straight weekly gain. The loonie was trading 0.6% higher at 1.4360 per U.S. dollar, or 69.64 U.S. cents, after trading in a range of 1.4356 to 1.4447. “It’s a bit higher, mostly because U.S. equities are seeing a slight rebound,” said Howard Du, an FX Strategist at BofA Securities. U.S. stocks rose after a broad selloff on Wall Street earlier this week as investors assessed the fallout of tariff policies on economic growth, while new data signaled deteriorating consumer sentiment and a surge in inflation expectations. Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to the signal stocks send about the economic outlook. The swearing in of Carney as Canada’s prime minister puts a former central banker in charge of the country and its economy. “The market sees it as modestly positive for Canada and the Canadian dollar,” Du said. “But overall it’s still going to be the global macro dynamic, tariffs, that drive dollar-CAD.

 EURO GAINS AFTER GERMAN FISCAL DEAL; DOLLAR BUOYED WITH US GOVERNMENT SHUTDOWN LIKELY AVERTED

The euro rose on Friday after German parties agreed on a fiscal deal that could boost defence spending and revive growth in Europe’s largest economy. The dollar weakened against the euro but rose against the Swiss franc and the yen, underpinned by the likelihood the U.S. government will avert a shutdown over the weekend, extending gains as data showed inflation expectations picked up, suggesting the Federal Reserve will likely be patient in cutting interest rates. German Chancellor-in-waiting Friedrich Merz announced he had secured the crucial backing of the Greens for a massive increase in state borrowing. The deal will likely be approved by the outgoing parliament next week. It includes a 500 billion euro ($544.30 billion) fund for infrastructure and sweeping changes to borrowing rules. Dominic Bunning, head of G10 FX Strategy at Nomura, said he sees upside for the euro especially against the Swiss franc and British pound on prospects of German fiscal spending. “We expect the German fiscal reform to pass next week and the ECB holding rates steady in April, a more hawkish outcome than is currently priced in,” Bunning said.

STERLING EASES AFTER UK ECONOMY UNEXPECTEDLY CONTRACTS IN JANUARY

Sterling lost some ground versus the dollar on Friday after data painted a grim picture of the British economy, and it softened against the euro as prospects of a German debt deal lifted the shared European currency. The British pound fell as much as 0.25% to $1.2918 before clawing its way back up to $1.2943. But it was still not far off its four-month peak of $1.2990 hit on Wednesday. British gross domestic product contracted unexpectedly by 0.1% in January compared with December. A Reuters poll of economists had forecast a monthly expansion of 0.1%. Analysts said they do not expect the weak reading to lead to the Bank of England turning dovish on interest rates. The British public’s expectations for inflation in the long run rose in February to their highest level in more than five years, a Bank of England survey showed on Friday, likely underscoring its cautious approach to cutting rates. “For GBP we do think the weaker growth data is an important reminder that UK cyclical and fiscal dynamics may continue to be more challenging than elsewhere,” said Dominic Bunning, global forex strategist at Nomura.

US DOLLAR RISES AS MARKETS CONSOLIDATE POSITIONS; OUTLOOK REMAINS DOWNBEAT

The U.S. dollar rose against most major currencies including the Swiss franc and the euro on Thursday, as investors consolidated positions after selling the greenback for most of this week, but the outlook remained weak amid concerns about slowing growth arising from the Trump administration’s trade policies. U.S. President Donald Trump threatened to impose a 200% tariff on wine, cognac and other alcohol imports from Europe, opening a new front in a global trade war that has roiled financial markets and raised recession fears. Trump on Wednesday also threatened to retaliate against the EU’s announcement that it would place counter-tariffs on $28 billion worth of U.S. imports from next month. Labor Department data on Thursday showed that U.S. producer prices were unexpectedly unchanged on a monthly basis in February, but the prospects of tariffs are unlikely to keep prices down in the coming months. “We’ve had a very large dollar weakening move in the previous days and weeks and it feels like we’re entering a bit of a consolidation period,” said Vassili Serebriakov, FX strategist at UBS in New York, who raised his year-end forecast for the euro against the dollar to $1.120 from $0.990.