Dollar Firm as Risk Off Impulses Start Eventful Week

March 31, 2025

Win Thin

Reciprocal tariffs may be universal; March Chicago PMI and Dallas Fed manufacturing survey will be reported; the growth outlook is still diverging; Colombia is expected to keep rates steady at 9.5%
Eurozone March CPI readings continue to roll out; the eurozone disinflationary process remains well on track
Japan’s GPIF confirmed it will maintain its current portfolio composition for the next five years; Japan real sector data for February were mostly softer; New Zealand March ANZ business confidence was mixed; China reported firm official March PMIs

The dollar is firm as an eventful week starts with a risk off vibe. DXY is trading higher near 104.134 after two straight down days as more tariff threats (see below) rattles global markets. The yen and Swiss franc are also outperforming, with USD/JPY trading lower near 149.30 and EUR/CHF trading lower near 0.95315. Both the euro and sterling are trading lower near $1.0815 and $1.2930, respectively. This is a huge week for the markets. Not only do we get a slew of key U.S. and eurozone data, but also perhaps some clarity on U.S. trade policy. There are also plenty of Fed speakers, culminating in Chair Powell’s speech Friday. Markets will be looking for confirmation that U.S. exceptionalism is over, but we are not so quick to bury this theme. Stay tuned.

AMERICAS

Reciprocal tariffs may be universal. Specifically, President Trump said “You’d start with all countries, so let’s see what happens. I haven’t heard a rumor about 15 countries, 10 or 15.” He added that “We’re going to be much nicer than they were to us, but it’s substantial money for the country.” Last week, it was reported that the U.S. would initially target the so-called “Dirty 15” but we really won’t know the whole story until Wednesday.

March Chicago PMI will be reported. Headline is expected to fall half a point to 45.0. This series has not correlated with the national readings for the past several years and so offers little insight into the ISM PMIs out later this week. Manufacturing will be reported tomorrow and headline is expected at 49.5 vs. 50.3 in February. Services will be reported Thursday and headline is expected at 53.0 vs. 53.5 in February.

March Dallas Fed manufacturing survey will also be reported. Headline is expected at -5.0 vs. -8.3 in February. So far, these surveys have come in on the weak side.

The growth outlook is still diverging. The New York Fed Nowcast model estimates Q1 growth at 2.9% SAAR and Q2 growth at 2.6% SAAR and will be updated Friday. Contrast this with the Atlanta Fed GDPNow model, which estimates Q1 at a whopping -2.8% SAAR and will be updated tomorrow after the data. When adjusted for trade in gold, its Q1 estimate improves to -0.5% SAAR. Due to different statistical methodology, the Atlanta Fed model tends to react more to individual data points and is more volatile than the New York Fed model. Q1 draws to a close this week but we won’t get official GDP data until April 30.

Colombia central bank is expected to keep rates steady at 9.5%. However, the market is split as about a third of the analysts polled by Bloomberg look for a 25 bp cut to 9.25%. At the last meeting January 31, the bank delivered a hawkish surprise and kept rates steady at 9.5% vs. an expected 25 bp cut. It was a split 5-2 vote, with the two dissents in favor of 25 bp and 50 bp cuts. The bank cited “fiscal uncertainty and a volatile exchange rate” as reasons for the hold, adding that “External financial conditions have tended to become more restrictive with the new US government’s policies on trade, energy and migration, which could have inflationary effects.” Since then, inflation has come in higher than expected and so we look for steady rates today. Central bank minutes will be released Thursday. Of note, the swaps market is pricing in 100 bp of easing over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Eurozone March CPI readings continue to roll out. Italy’s EU harmonized inflation came in three ticks higher than expected at 2.1% y/y vs. 1.7% in February. Germany reports later today and is expected to fall two ticks to 2.4% y/y. German state data reported so far have been mixed. Eurozone-wide readings will be out tomorrow. Headline is expected to fall a tick to 2.2% y/y and core is expected to fall a tick to 2.5% y/y. The country prints for March released last week point to some downside risks. France came in two ticks lower than expected at 0.9% y/y and remained steady from February while Spain came in seven ticks lower than expected at 2.2% y/y vs. 2.9% in February.

The eurozone disinflationary process remains well on track. Recent comments from a handful of ECB policymakers suggests the decision to cut or a pause in April will be live. However, markets are pricing in about 85% odds of a 25 bp cut to 2.25% at the next meeting April 17. We fully expect the ECB to deliver a cut next month to preempt the drag to growth from U.S. tariffs. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to cut rates more than is currently priced in (roughly 50 bp of total easing over the next 12-months but now with over 50% odds of another 25 bp cut).

ASIA

Japan’s Government Pension Investment Fund confirmed it will maintain its current portfolio composition for the next five years. GPIF has a 25% asset allocation across domestic and foreign stocks and bonds. However, the deviation limits to the target allocation will be narrower at +/-5 to 6% vs. +/-6 to 8% previously, depending on the asset class. The implications for JPY are negligible and supports our view that the modest BOJ tightening cycle is unlikely to bring home a wave of Japanese cash from abroad. Of note, the Nikkei 225 has entered a technical correction after falling -4.1% today.

Japan real sector data for February were mostly softer. IP came in at 0.3% y/y vs. 1.2% expected and 2.2% in January, retail sales came in at 1.4% y/y vs. 2.5% expected and a revised 4.4% (was 3.9%) in January, and housing starts came in at 2.4% y/y vs. -2.2% expected and -4.6% in January. Q1 Tankan report out tomorrow should show that the business outlook is weakening for the most part.

New Zealand March ANZ business confidence was mixed. Business confidence fell nearly a point to 57.5, while expected own activity rose to 48.6 vs. 45.1 in February. Reported past activity, which has the best correlation to GDP, improved 3.7 points to 0.8 and remains indicative of a soft recovery in economic activity. The RBNZ has penciled in another 75 bp of easing over the next 12 months that would see the policy rate bottom at 3.00%. This is roughly in line with market pricing.

China reported firm official March PMIs. Manufacturing came in a tick higher than expected at 50.5 vs. 50.2 in February, while non-manufacturing came in two ticks higher than expected at 50.8 vs. 50.4 in February. As a result, the composite rose three ticks to 51.4. Caixin reports its manufacturing PMI tomorrow and is expected to fall two ticks to 50.6. It then reports its services and composite PMIs Thursday and is expected to pick up a tick to 51.5. The economic data have been stabilizing in recent months but the cautious nature of stimulus measures seen so far argue against a strong rebound in 2025.

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