Dollar Soft as Risk Off Impulses Ease

March 11, 2025

Win Thin

The dollar smile remains intact; JOLTS data have taken on greater importance; NFIB small business optimism eased in February; the growth outlook remains cloudy
Germany’s ruling coalition is pushing to get fiscal stimulus passed; ECB officials are starting to comment on the impact of fiscal stimulus
Japan Q4 GDP growth was revised down; Australia reported a mixed February NAB business survey

The dollar remains soft as market sentiment improves modestly. DXY is trading lower near 103.579 after testing the November 5 low near 103.373 earlier today. Clean break below sets up a test of the September low near 100.157. The yen and Swiss franc are also underperforming, with USD/JPY trading higher near 147.55. The euro is trading higher near $1.0890 due to optimism regarding German fiscal stimulus (see below), while sterling is trading higher near $1.2930. While the dollar gained yesterday on risk off impulses, recent softness in the U.S. data continues to weigh 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. 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. With so much focus on the labor market, today’s JOLTS data has taken on much great importance (see below).

AMERICAS

The dollar smile remains intact. Other than that, there’s not much we can add to yesterday's price action. We really don't think the U.S. data have shown enough weakness to justify these large risk off moves across markets. That said, markets hate uncertainty and tend to assume the worst will happen. Too many ad hoc policies have been enacted this past month that pose downside risks, and that is really taking a toll on sentiment that can quickly become sell-fulfilling. Sentiment has improved modestly today but we suspect these risk off episodes will become more common until the data start to show market improvement.

JOLTS data have taken on greater importance. Job openings are expected to remain steady at 7.600 mln. Job openings have declined but the ratio of job openings to unemployed remains strong above 1. Moreover, layoffs have remained low but may not yet reflect the recent impact of the Department of Government Efficiency (DOGE) actions. Of note, the openings rate is expected to remain steady at 4.5%, which stands at the threshold where a sharp rise in the unemployment rate becomes likely. Stay tuned.

NFIB small business optimism eased in February. Headline fell to 100.7 vs. 101.0 expected and 102.8 in January. This was the second straight drop to the lowest since October after peaking at 105.1 in December. The Trump bump has faded for small businesses, it seems. The net share of respondents expecting better economic conditions over the next six months fell sharply to 37% vs. 47% in January, while the net share raising their selling prices rose to 32% vs. 22% in January. The uncertainty index rose to 104 vs. 100 in January, and NFIB Chief Economist Dunkelberg noted that "Uncertainty is high and rising on Main Street, and for many reasons.” He added that "Inflation remains a major problem, ranked second behind the top problem, labor quality."

February New York Fed survey of consumer expectations rose. 1-yaer Inflation expectations rose a tick to 3.1%, while 3- and 5-years expectations were unchanged at 3.0%. The Fed won’t be happy with this creep higher in inflation expectations.

The growth outlook remains cloudy. The New York Fed's Nowcast model is tracking Q1 growth at 2.67% SAAR vs. 2.94% previously and Q2 growth at 2.58% SAAR vs. 2.85% previously. Both readings will be updated Friday. This is much better than the Atlanta Fed's GDPNow model, which has Q1 at -2.4% SAAR and won't be updated until next Monday. When adjusted for the unusual surge in nonmonetary gold imports the model would be tracking growth at 0.4% SAAR. Yes, gold imports. Note that there is often a lot of volatility in the Atlanta Fed model estimates during the early months.

EUROPE/MIDDLE EAST/AFRICA

Germany’s ruling coalition is pushing to get fiscal stimulus passed. The CDU/CSU and SPD parties are in high stakes negotiations with the Green party to get the draft debt package passed in the current parliament, before the new parliament is set to convene by March 25. As part of a counterproposal, the Greens want to raise the threshold for defense spending exemptions from debt rules to 1.5% of GDP compared to 1.0% in the current plan. The CDU/CSU and SPD coalition need the support of the Green party to have the required two-thirds majority for a constitutional amendment. As background, the German government could invest as much as EUR1 trln over the next decade. The fiscal package introduced last week includes EUR500 bln for infrastructure spending and a special measure to amend the constitution to exempt defense spending above 1% of GDP from the constitutional debt brake. To appreciate the magnitude of this proposal, Germany invested EUR1.5 trln over two decades following the reunification of East and West Germany.

ECB officials are starting to comment on the impact of fiscal stimulus. GC member Rehn said that increased spending on the military won’t “necessarily” lead to a halt in its easing cycle, adding that the ECB “will maintain complete freedom of action” due to increased uncertainty. Rehn stressed that “It will depend on the overall impact of defense spending and other factors, which will occur in parallel within the same time-frame.” We concur. After reports emerged that ECB officials expect tough negotiations over another cut in April, markets see only around 50% odds of a 25 bp cut then. Looking ahead, the swaps market is still pricing in nearly 75 bp of easing over the next 12 months.

ASIA

Japan Q4 GDP growth was revised down a tick to 0.6% q/q. Private demand fell -0.3% q/q in Q4 compared to a preliminary estimate of -0.1%. The sharper decline was driven by residential investment, which dropped -0.2% q/q from an initial read of 0.1%. Household consumption was flat from an initial estimate of 0.1% while non-residential investment rose 0.6% q/q from an initial estimate of 0.5%. Consumption is starting off on a weak note in Q1, as January household spending came in at 0.8% y/y vs. 3.7% expected and 2.7% in December. We also suspect net exports will contribute less to growth this year due to a global slowdown.

Australia reported a mixed February NAB business survey. Business conditions rose 1 point to 4 while business confidence fell 6 points to -1 and largely reversing January’s improvement. The employment sub-index edged down 1 point to 4 but remains above the long-term average of around 3.0 and is indicative of encouraging labor market conditions. The RBA signaled it will pay particular attention to labor market development to guide future policy decision. The swaps market continues to price in almost 75 bp of easing over the next twelve months, with the next 25 bp cut largely priced in for May.

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