Dollar Firm as Tariff Threats Intensify

February 27, 2025

Win Thin

Tariff uncertainty is intensifying; Fed officials remain cautious; financial conditions continue to loosen; weekly jobless claims will be of interest; we get the first revision to Q4 GDP data
Eurozone preliminary February CPI data have started rolling out; ECB publishes the account of its January meeting; Iceland reported soft February CPI data
Australia Q4 capex survey was soft; New Zealand February ANZ business confidence survey was mixed

The dollar continues to firm as tariffs are back in the spotlight. DXY is trading higher for the second straight day near 106.645 after President Trump said tariffs on the EU are coming (see below). The yen is underperforming, with USD/JPY trading higher near 150 after trading below 149 yesterday. The euro is trading lower near $1.0480, while sterling is trading lower near $1.2670. Recent softness in the U.S. data is concerning, but we are not ready to push the panic button yet. If the data continue to soften, however, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will be called into question. We’re not there yet, but the lack of any topline U.S. data until tomorrow is likely to keep markets nervous and choppy.

AMERICAS

Tariff uncertainty is intensifying. When asked about tariffs on the EU at the first cabinet meeting, President Trump responded "We'll be announcing it very soon and it'll be 25%, generally speaking." On the other hand, Trump may have delayed the tariffs on Mexico and Canada. Those are set to begin March 4 and Trump said “I’m not stopping the tariffs” before later saying they would be implemented April 2. Delaying tariffs is almost as bad as enacting them. By drawing out the uncertainty, firms are left with an uncertain outlook that will likely delay investment and hiring. A rolling one-month threat will just perpetuate this uncertainty.

More and more countries are likely to be targeted. The UK may avoid direct tariff threats as it is one of the few countries that run trade deficits with the U.S. Same goes for Australia and Singapore. Which countries run the biggest trade surpluses with the U.S.? The top 12 are: China, Mexico, Canada, Vietnam, Germany, Japan, Ireland, Italy, Korea, India, Thailand, and Malaysia. Based on this ranking, we continue to believe that Japan will eventually come under tariff threats.

Fed officials remain cautious. Bostic said “We need to stay where we are. You can say that we’re hitting our employment mandate, and now we have to get the price stability mandate under control. We need to be in a restrictive posture.” Bostic reflects Fed consensus right now but if the data continue to come in soft, the Fed will have to change its tune. For now, markets are still pricing in only two cuts, in July and December. Barkin, Schmid, Barr, Bowman, Hammack, and Harker speak today.

Financial conditions continue to loosen. Through last week, the Chicago Fed's measure loosened for the 12th straight week to the loosest since mid-October 2021. This should help support the economy this year.

Weekly jobless claims will be of interest. That’s because continuing claims will be for the BLS survey week containing the 12th of the month and are expected at 1.871 mln vs. 1.869 mln previously. Initial claims for the BLS survey week were reported last week. This week, they are expected at 221k vs. 219k previously. The weekly claims data have taken on much greater significance in light of the DOGE-mandated layoffs but so far, there have been little signs of stress in the labor market. Bloomberg consensus for February NFP stands at 155k vs. 143k reported for January. while its whisper number stands at 138k.

We get the first revision to Q4 GDP data. Growth is expected to be unchanged from the preliminary at 2.3% SAAR. As we have noted before, the details in the preliminary report were much stronger than the headline suggests, as private domestic demand rose a still-strong 3.2% SAAR. Revised personal consumption is expected to slow a tick to 4.1% SAAR. Estimates for Q1 growth are mixed, however, with the Atlanta Fed GDPNow model tracking at 2.3% SAAR and the New York Fed Nowcast model at 3.0% SAAR. Both models will be updated tomorrow.

February Fed regional surveys will continue rolling out. Kansas City Fed manufacturing will be reported and is expected at -4 vs. -5 in January. Its services survey will be reported tomorrow.

EUROPE/MIDDLE EAST/AFRICA

Eurozone preliminary February CPI data have started rolling out. Spain kicked things off today and its EU Harmonised CPI came in steady as expected at 2.9% y/y. Spain is one of the only eurozone countries to report core inflation and it came in at 2.1% y/y vs. 2.3% expected and 2.4% in January. Tomorrow, Germany’s EU Harmonised inflation is expected to fall a tick to 2.7% y/y, France’s is expected to fall six ticks to 1.2% y/y, and Italy’s is expected to rise a tick to 1.8% y/y. All these will provide further clues for the eurozone CPI data due out next Monday.

European Central Bank publishes the account of its January meeting shortly. At that meeting, the ECB delivered a widely expected 25 bp cut to 2.75%. President Lagarde confirmed that the decision to ease was unanimous. Lagarde also stressed there were no discussions about where to stop cutting rates and unlike in December, there was no debate “at all” about cutting rates by 50 bp. The swaps market is still pricing in 75 bp of easing over the next 12 months, but there are now around 33% odds of another 25 bp cut after that.

Iceland reported soft February CPI data. Headline slowed to 4.2% y/y vs. 4.6% in January. This is the lowest since February 2021 and nearing the 1-4% target range. At the last meeting February 5, Sedlabanki cut rates 50 bp to 8.0%. Governor Jonsson said “It’s quite clear that we might have some room for further cuts, but from the spring onwards we will just have to see how inflation expectations develop.” Next meeting is March 19 and another 50 bp cut seems likely after the favorable CPI data.

ASIA

Australia Q4 capex survey was soft. Business investment came in at -0.2% q/q vs. 0.5% expected and a revised 1.6% (was 1.1%) in Q3. Weakness was driven by a decline in equipment, plants, and machinery. Encouragingly, the first estimate for planned capex for 2025-26 was up 1.8% to AUD148 bln on the first estimate for 2024-25. Regardless, the RBA signaled it will pay particular attention to labor market development to guide future policy decision. The swaps market is still pricing in around 50 bp of easing over the next 12 months that would see the policy rate bottom around 3.60%.

New Zealand February ANZ business confidence survey was mixed. Business confidence rose 4 points to 58.4 in February, while expected own activity eased 0.7 ticks to 45.1. Reported past activity, which has the best correlation to GDP, fell 3 points to 2.9 and is indicative of a shaky recovery in economic activity. February ANZ consumer confidence index will be reported tomorrow. Recent data support the RBNZ’s guidance for a more gradual pace of easing. 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 seems about right.

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