Dollar Soft as Geopolitical Concerns Ebb

March 03, 2025

Win Thin

Encouraging geopolitical developments have emerged; February ISM manufacturing PMI will be the highlight; the Q1 growth outlook is mixed; Canada February PMIs will also be reported
Eurozone February CPI data ran slightly hot; final February eurozone manufacturing PMIs are worth discussing; Turkey reported softer February CPI
Caixin reported firm February manufacturing PMI; New Zealand’s TOT index overshot expectations

The dollar is soft as geopolitical tensions ebb. DXY is trading lower near 107 after three straight up days on encouraging signs out of Europe regarding Ukraine (see below). The yen is underperforming again, with USD/JPY testing 151 after trading as low as 148.55 last week. The euro is outperforming on the hopeful geopolitical backdrop and is trading higher near $1.0450, while sterling is trading higher near $1.2655. We are a bit skeptical about an imminent Ukraine peace deal. Elsewhere, 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. Data this week will be key. Lastly, tariffs are likely to come into force this week and should help keep the dollar firm.

AMERICAS

Encouraging geopolitical developments have emerged. As a result, the dollar has largely retraced Friday’s gains triggered by the televised Oval Office confrontation, while risk assets are recovering. U.K. Prime Minister Starmer and French President Macron are promoting a new path for a Ukraine-Russia peace deal. The first part is a one-month ceasefire covering air, sea, and energy infrastructure to help establish confidence on both sides. The second part is for Ukrainian President Zelenskiy to sign the revenue-sharing minerals deal with the U.S. What’s unclear is whether the U.S. will provide the explicit security assurances that Ukraine has requested, which was reportedly the flashpoint for Friday’s dust-up. Stay tuned.

This will be an important week for the markets. Topline U.S. economic will hopefully help markets determine whether recent softness was a quirk or not. Furthermore, tariffs are scheduled to go into effect tomorrow and another delay would shake markets up yet again. Lastly, the Fed could send strong signals about its policy stance via its Beige Book report and numerous speakers ahead of the Friday start of the media blackout. All of these events are key and we believe they will largely support the strong dollar narrative. Musalem speaks today.

February ISM manufacturing PMI will be the highlight. Headline is expected to fall a tick to 50.8. Prices paid are expected at 56.3 vs. 54.9 in January, new orders are expected at 54.6 vs. 55.1 in January, and employment is expected at 50.1 vs. 50.3 in January. The regional Fed ISM manufacturing prints suggest the risks are balanced. Of note, S&P Global manufacturing PMI rose 0.4 ticks to 51.6 in February, matching the June 2024 high. January construction spending (-0.1% m/m expected) and February vehicle sales (16.08 mln annual rate expected) will also be reported today.

The Q1 growth outlook is mixed. The Atlanta Fed’s GDPNow model is tracking growth at -1.5% SAAR, down sharply from 2.3% SAAR after the trade and spending data Friday. It will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q1 growth at 2.94% SAAR from Friday, little changed from 2.95% the previous week. It will be updated next Friday and its initial Q2 estimate will also come out then. Remember, the Q1 growth estimates so far are basically based on one month's data (January) and so the early numbers can bounce around quite a bit as the second and third month of data are reported. This week brings a load of February data and should give a clearer picture of the U.S. economic outlook.

Canada February PMIs will also be important. S&P Global reports its manufacturing PMI today. Services and composite PMIs will be reported Wednesday. Ivey PMI will be reported Thursday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone February CPI data ran slightly hot. Headline CPI inflation came in a tick higher than expected at 2.4% y/y vs. 2.5% in January and core came in a tick higher than expected at 2.6% y/y vs. 2.7% in January. Services inflation fell to ticks to 3.7% y/y. Overall, the disinflation process remains on track and the ECB has scope to deliver on rate cut expectations. The ECB is widely seen cutting rates 25 bp to 2.50% Thursday. The ECB is also expected remove reference that monetary policy remains restrictive because the policy rate is getting close to neutral rate territory. ECB staff estimate the neutral rate at 1.75%-2.25%. Scrapping the restrictive reference would signal limited scope to ease policy more than is currently priced in and offer EUR some support.

Final February eurozone manufacturing PMIs are worth discussing. Not because the headline improved three ticks from the preliminary to 47.6 as Germany and France improved slightly. What’s noteworthy is that Spain fell to 49.7 vs. 51.4 expected and 50.9 in January. This means the manufacturing sectors of the four largest eurozone economies are now contracting. Final services and composite PMIs will be reported Wednesday and will give a more complete picture of the eurozone economy.

Turkey reported softer February CPI data. Headline came in at 39.05% y/y vs. 39.90% expected and 42.12% in January, while core came in at 40.21% y/y vs. 41.10% expected and 42.65% in January. Headline was the lowest since June 2023 but remains well above the 3-7% target range. The central bank then meets Thursday and is expected to cut rates 250 bp to 42.50%. However, the downside miss to Cpi suggests risks of a dovish surprise. At the last meeting February 6, the bank cut rates 250 bp for the second straight time to 45.00%, as expected. The swaps market is pricing in 1450 bp of total easing over the next 12 months that would take the policy rate to 30.5%, but this may be too optimistic if inflation overshoots the bank’s updated year-end forecast of 24% vs. 21% previously.

ASIA

Caixin reported firm February manufacturing PMI. Headline came in four ticks higher than expected at 50.8 vs. 50.1 in January. Services and composite PMIs will be reported Wednesday, with services expected to fall three ticks to 50.7. Over the weekend, official PMI readings came in firmer. Manufacturing came in at 50.2 vs. 49.9 expected and 49.1 in January, while non-manufacturing came in as expected at 50.4 vs. 50.2 in January. As a result, the composite rose a full point to 50.1. However, the growth outlook will remain unimpressive as long as policymakers fail to address the root cause of weak consumption spending activity: low household income levels, high precautionary savings, and high levels of household debt. China’s annual “Two Sessions” National People's Congress meeting begins Wednesday. While detailed policy announcements are not expected, the sessions provide a valuable insight into the government’s fiscal and growth objectives.

New Zealand’s terms of trade index overshot expectations. The index rose 3.1% q/q in Q4 vs. 1.4% expected and a revised 2.5% (was 2.4%) in Q3 to the highest level since Q2 2022. Higher terms of trade has a positive net wealth effect on the economy and raises the fundamental value of NZD. Nonetheless, NZD needs to keep trading at a deep discount to fundamental equilibrium (which we estimate at around 0.6600) to attract foreign investment and recycle the country’s large current account deficit (-6.4% of GDP).

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