Dollar Gains as Trump Softens Tone

April 23, 2025

Win Thin

Trump said he has no intention of firing Powell; Trump also dialed down tensions with China; these developments support our belief that the markets can in fact impact Trump policy; the Fed releases its Beige Book report; IMF published its latest WEO; the global divergence story may not be dead yet; S&P Global reports preliminary April PMIs
Eurozone and U.K. reported soft preliminary April PMIs; ECB wage tracker points to slower gains ahead; ECB and BOE easing expectations have picked up
Japan reported firmer April preliminary PMIs; Australia reported softer April preliminary PMIs

Please check out our Mind on the Markets Quarterly. We look at three themes shaping markets in Q2: EU integration/disintegration, tariffs and a possible tipping point for US economic exceptionalism, and a “Mar-a-Lago Accord.”

The dollar continues to gain. DXY is trading higher for the second straight day near 99.135 after trading as low as 97.921 Monday, the lowest since April 2022. The greenback is seeing a relief rally as President Trump changed his tune on Powell and China (see below). The yen and Swiss franc are underperforming, with USD/JPY trading higher near 142 and EUR/CHF trading higher near .93945. Elsewhere, the euro is trading lower near $1.1405 and sterling is trading lower near $1.3310 as April PMI readings for both fell. We continue to believe that much of the recent dollar weakness is due to a growing loss of confidence in U.S. policymakers as well as the negative impact of policy uncertainty on the U.S. economy. Today’s relief rally is based on yet another shift in mercurial policies under President Trump. Until we get total clarity on U.S. tariff policy, we look for continued dollar weakness and view any dollar recoveries as quite fragile, no matter how the U.S. data come in.

AMERICAS

President Trump said he has no intention of firing Fed Chair Powell. However, he added that “I would like to see him be a little more active in terms of his idea to lower interest rates.” While this is welcome news, there is simply no guarantee that it won’t be discussed again. As we’ve pointed out before, just the fact that this was being studied means that the threat should always be taken seriously.

Trump also dialed down tensions with China. Specifically, he promised to “be very good to China” and said that tariffs would come down “substantially” in the event of a trade deal. U.S. officials in general are trying to put a positive spin on trade talks. First, the U.S. said there has been “significant progress” in trade talks with India. Then, Treasury Secretary Bessent said he expects the trade conflict with China to de-escalate in the near future. Lastly, Politico reported that the U.S. is close to trade deals with both Japan and India. Color us skeptical. A recent Torsten Slok piece on trade agreements suggests the average time to reach a deal is 18 months.

Both of these developments support our belief that the markets can in fact impact Trump policy. The trade war and potential moves to limit Fed independence have been the two biggest market drivers this past month and so it seems pretty clear that President Trump is now trying to limit the market fallout from his controversial policies. Whether these shifts can be sustained is an entirely different matter but for now, markets should breath a big sigh of relief.

The Fed releases its Beige Book report. The Beige Book will offer some insights on how recent tariff policy and government layoffs are affecting the economy. The March Fed Beige Book, compiled using information gathered on or before February 24, suggested the barrage of tariff announcement had not yet shaken confidence in the US economy but pointed to upside risks to inflation. Since then, things have only gotten more uncertain and so we expect this Beige book to highlight more tangible impact of the tariffs, with upside risks to inflation and downside risks to growth seen.

Last week’s speech by Powell made it clear that the Fed remains in wait and see mode. Other Fed officials are similarly cautious. Kashkari said “We just don’t know right now with confidence: Is this a one-time effect on inflation, or is it something longer term. Our job with the Fed is to make sure it is not something longer term.” Fed officials are right to question the transitory nature of tariffs, especially given the piecemeal rollout so far. It's not a just a one-shot event. Barkin said “We’ve just had an experience with inflation that may have loosened expectations. It’s our job to keep inflation under control, so that you don’t get inflation expectations out of control, so that you don’t get stagflation.” Kugler warned that “This month, we learned that the tariff increases are significantly larger than previously expected. As a result, the economic effects of tariffs and the associated uncertainty are also likely to be larger than anticipated.” Kugler, Goolsbee, Musalem, Waller, and Hammack speak today.

The IMF published its latest World Economic Outlook. The IMF warned that “Intensifying downside risks dominate the outlook, amid escalating trade tensions and financial market adjustments. Divergent and swiftly changing policy positions or deteriorating sentiment could lead to even tighter global financial conditions. Ratcheting up a trade war and heightened trade policy uncertainty may further hinder both short-term and long-term growth prospects.”

Growth forecasts were cut sharply. The global growth forecast was cut by 0.5 ppt to 2.8% in 2025 and by 0.3 ppt to 3.0% in 2026. No country was spared. The U.S. forecast was cut by 0.9 ppt to 1.8% in 2025 and by 0.4 ppt to 1.7% in 2026, the eurozone forecast was cut by 0.2 ppt to 0.8% in 2025 and by 0.2 ppt to 1.2% in 2026, the Japan forecast was cut by 0.5 ppt to 0.6% in 2025 and by 0.2 ppt to 0.6% in 2026, and the U.K. forecast was cut by 0.5 ppt to 1.1% in 2025 and by 0.1 ppt to 1.4% in 2026. Elsewhere, the China forecast was cut by 0.6 ppt to 4.0% in 2025 and by 0.5 ppt to 4.0% in 2026. Of note, these forecasts were based on information available as of April 4. The agency warned that if the additional tariffs and retaliatory tariffs announced April 5-14 were incorporated, “the losses in China and the United States would become larger in 2026 and beyond.”

The global divergence story may not be dead yet. The eurozone, U.K., and Australia all reported weaker composite PMIs in April, while Japan reported an improvement that is unlikely to be sustained. The eurozone is nearing contractionary territory, while the U.K. is already in it. The big question of course is whether the U.S. finally starts to show cracks. We’ll know later today but for the most part, the PMI readings so far support the age-old adage that when the U.S. sneezes, the rest of the world catches a cold. Stay tuned.

S&P Global reports preliminary April PMIs. Manufacturing is expected at 49.0 vs. 50.2 in March, services is expected at 52.6 vs. 54.4 in March, and the composite is expected at 52.0 vs. 53.5 in March. If so, this would nearly reverse last month’s improvement from 51.6 in February.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported soft preliminary April PMIs. Headline manufacturing came in at 48.7 vs. 47.4 expected and 48.6 in March, services came in at 49.7 vs. 50.5 expected and 51.0 in March, and the composite came in at 50.1 vs. 50.2 expected and 50.9 in March. This was the lowest composite reading since December and is nearing the key 50 boom/bust level. Looking at the country breakdown, the German composite came in at 49.7 vs. 50.5 expected and 51.3 in March and the French composite came in at 47.3 vs. 47.8 expected and 48.0 in February. Italy and Spain will be reported with the final PMI readings in early May.

The ECB wage tracker points to slower gains ahead. It implies wage growth of 1.6% y/y in Q4, the lowest since early 2022. Looking ahead, the survey shows wage growth of 3.0% in 2025 and 2.5% in 2026 vs. 4.3% in 2024. Most measures of labor costs in the eurozone have peaked and should allow the ECB to continue easing this year.

ECB easing expectations have picked up. The market has nearly priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in nearly 100 bp of total easing over the next 12 months that would see the policy rate bottom near 1.25%. Look for the ECB hawks to push back this week against this dovish market pricing. Knot, Villeroy, Lane, and Cipollone speak today.

U.K. reported weak April preliminary PMIs. Manufacturing came in as expected at 44.0 vs. 44.9 in March, services came in at 48.9 vs. 51.5 expected and 52.5 in March, and the composite came in at 48.2 vs. 50.4 expected and 51.5 in March. This was the lowest composite reading since November 2022 and is below the key 50 boom/bust level.

Bank of England easing expectations have picked up. The market has nearly priced in a 25 bp cut at the next meeting May 8. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 3.5%. Chief Economist Pill, Governor Bailey, and MPC member Breeden speak Wednesday. MPC member Lombardelli speaks Thursday. MPC member Greene speaks Friday.

ASIA

Japan reported firmer April preliminary PMIs. Manufacturing rose a tick to 48.5, services rose over two full points to 52.2, and the composite rose to 51.1 vs. 48.9 in March. The recovery back above 50 seems unlikely to be sustained given the deteriorating global outlook.

Australia reported softer April preliminary PMIs. Manufacturing fell four ticks to 51.7, services fell two ticks to 51.4, and the composite fell two ticks to 51.4. March composite reading of 51.6 was the highest since August 2024, but the rise was unlikely to be sustained given the deteriorating outlook for regional trade and activity. The RBA is expected to cut rates 25 bp to 3.85% at the next meeting May 20, with 20% odds of a larger 50 bp move. Looking ahead, the swaps market is pricing in 125 bp of total easing over the next 12 months.

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