Dollar Remains Under Pressure as New Week Begins

March 10, 2025

Win Thin

Tariffs are due this week; Chair Powell gave us the definitive Fed view last Friday; February New York Fed survey of inflation expectations will be the highlight; Canada’s Liberal Party has a new leader; China imposed retaliatory tariffs on Canada
Plenty of ECB speakers are due throughout the week; March Sentix investor sentiment showed a huge shift; Norway February CPI data ran hot
Japan January cash earnings data were mixed; Japan also reported January current account data; China is back in deflationary territory

The dollar remains under pressure as the new week begins. DXY is trading lower for the sixth straight day near 103.633 and is nearing a test of the November 5 low near 103.373. Clean break below sets up a test of the September low near 100.157. USD/JPY is trading lower near 147 despite mixed wage data (see below). The euro is trading higher near $1.0865, while sterling is trading higher near $1.2930. Recent softness in the U.S. data is concerning and has weighed on the greenback. We are not ready to push the panic button yet but if the data continue to soften, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will come into question. Friday’s jobs data was inconclusive and so markets are still running with the weak dollar trade. Tariffs that are due to take effect this week (see below) should help keep the dollar firm but so far, the many delays have instead fed into dollar softness. The dollar should eventually get some traction as the prospects of higher inflation from tariffs keep the Fed on hold (see below), but markets are for now focusing on the potential recessionary impact instead.

AMERICAS

Tariffs are due this week. Barring another last minute reversal, the 25% tariffs on all steel and aluminum imports into the U.S. will go into effect Wednesday. Last Friday, President Trump also warned that reciprocal tariffs on Canadian lumber and dairy products could come at any time rather than the April 2 data that’s been put forth already. Despite the back and forth, more tariffs are coming and that will make the Fed’s job that much harder. Of note, President Trump acknowledged that the economy faces a “period of transition” but fell short of mentioning a slowdown or recession.

Chair Powell gave us the definitive Fed view last Friday. He maintained his cautious stance, noting “Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place. We do not need to be in a hurry, and are well positioned to wait for greater clarity.” Powell acknowledged the potential impact of Trump policies but noted “While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high.” The pessimists might call this "whistling past the graveyard" However, it's clear from the latest Beige Book that the Fed does not yet see much impact from Trump policies. Of course, that can change quickly but for now, the Fed really feels that it can wait and see. We expect a neutral hold this month in order to maintain maximum flexibility in case the data go south quickly.

February New York Fed survey of inflation expectations will be the highlight. In January, the survey reinforced the case that progress on inflation is stalling well above 2%. Inflation expectations were unchanged at 3.0% at both the one- and three-year-ahead horizons, while median five-year-ahead inflation expectations rose 0.3 ppt to 3.0%. We see upside risks to the February readings.

Canada’s Liberal Party has a new leader. Mark Carney won with a massive 85.9% of the party vote. Carney will be sworn in as Prime Minister over the next few days and could call a snap election immediately after. This means an election could take place as soon as April 21. Carney could also wait until Parliament returns on March 24, where he’s expected to face a vote of no confidence that would trigger a snap election as early as May 5. Recent polls have shown a resurgence in support for the center-left Liberals at the expense of the center-right Conservative Party and the left-wing New Democratic Party. Still, the Conservative Party has a 7 to 10 point lead in most polls.

Over the weekend, China imposed retaliatory tariffs on Canada. Effective March 20, there will be a 100% tariff on rapeseed oil, rapeseed meal and pea products, and a 25% levy on pork and some seafood imports from Canada. Canada is one of the largest producers of rapeseed, also known as canola. These moves from China are in response Canada’s decision last year to put 100% tariffs on electric cars and 25% on steel and aluminum from China.

EUROPE/MIDDLE EAST/AFRICA

Plenty of ECB speakers are due throughout the week. Their comments could help shape rate expectations for the next meeting April 16-17. After reports that ECB officials expect tough negotiations over another cut, markets see only 50% odds of a 25 bp cut next month. Looking ahead, the swaps market is still pricing in nearly 75 bp of easing over the next 12 months. Nagel speaks later today.

March Sentix investor sentiment showed a huge shift. Eurozone sentiment came in at -2.9 vs. -9.3 expected and -12.7 in February. This was expected given the game-changing fiscal bazooka delivered by Germany. Furthermore, we are not at all surprised to see the U.S. reading drop to -2.7 vs. 21.2 in February given recent softness in the data as well as the unpredictable policy outlook. Time will tell whether this rotation out of the U.S. and into Europe can be sustained but for now, it’s the path of least resistance.

Norway February CPI data ran hot. Headline came in a full point higher than expected at 3.6% y/y vs. 2.3% in January, while underlying CPI came in half a point higher than expected at 3.4% y/y vs. 2.8% in January. Headline is the highest since April 2024 and further above the 2% target. At its January meeting, the Norges Bank kept rates steady at 4.5% and reiterated that “the policy rate will most likely be reduced in March.” The inflation overshoot raises the likelihood the bank delays the start of easing. The swaps market trimmed the odds of a 25 bp cut at the March 27 meeting from 90% to around 65%.

ASIA

Japan January cash earnings data were mixed. Nominal earnings came in at 2.8% y/y vs. 3.0% expected and 4.4% in December, while real earnings came in at -1.8% y/y vs. -1.6% expected and 0.3% in December. The less volatile scheduled pay growth for full-time workers came in a tick higher than expected at 3.0% y/y vs. 2.8% in December. Of note, the biggest trade union group Rengo is demanding larger wage hikes. Members are asking an average wage increase of 6.09% this year, up from last year’s 5.85%, seeking more than 6% for the first time in more than three decades. Faster wage growth is an upside risk to Japan’s inflation outlook and could force the Bank of Japan to normalize rates by more than is currently priced in. For now, the swaps market is still pricing in 75 bp of tightening over the next two years that would see the policy rate peak near 1.25%.

Japan also reported January current account data. The adjusted surplus came in at JPY1.938 bln vs. JPY1.987 trln expected and JPY2.732 trln in December. However, the investment flows will be of more interest. The January data showed that Japan investors remained net buyers of U.S. bonds (JPY636 bln) for the third straight month. Japan investors turned net sellers (-JPY30 bln) of Australian bonds as well as Canadian bonds (-JPY139 bln). Investors turned net buyers of Italian bonds (JPY16 bln) after one month of net selling. Overall, Japan investors turned total net buyers of foreign bonds (JPY449 bln) after one month of net selling. It’s still too early to say that Japan investors have stopped chasing higher yields abroad.

China is back in deflationary territory. February CPI came in three ticks lower than expected at -0.7% y/y vs. 0.5% in January and was the deepest deflation seen since January 2024. Core CPI declined for the first time since 2021 to -0.1% y/y vs. 0.6% in January, as services prices fell the most in four years. Finally, PPI deflation extended into its 29th month, falling by -2.2% y/y vs. -2.3% in January. With deflationary risks deepening, we expect further easing by the PBOC this year.

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