Dollar weakness continues. DXY is trading lower for the fifth straight day near 99.535 as tariff uncertainty continues (see below). USD/JPY is trading lower near 143.25. Elsewhere, both euro and sterling are trading higher near $1.1385 and $1.3185, respectively. The growth-sensitive majors and EM FX are bid to start the week but we expect weakness to resume as risks to global growth remain high regardless of the tariff pause. We also believe that this post-pause dollar weakness is due in large part to a growing loss of confidence in U.S. policymakers (see below) as well as the negative impact of policy uncertainty on the U.S. economy. As such, we look for continued dollar weakness and view any dollar recoveries as quite fragile, no matter how the U.S. data come in. Given the ongoing unpredictability of Trump administration policy, we continue to downplay any notions of a Fed response in the near term, which official comments would seem to support.
AMERICAS
The U.S. added to the tariff uncertainty over the weekend. The Department of Commerce announced late Friday that imports of consumer electronics were exempted from so-called reciprocal tariffs. On Sunday, Commerce Secretary Lutnick said that these goods would instead by subject to planned tariffs on semiconductors “coming in a month or two.” Just hours after that, President Trump confirmed that the exemption was temporary and that his administration will be taking a look at putting tariffs on semiconductors as well as the whole electronics supply chain. This ongoing policy confusion is likely to continue feeding into what we view as a growing loss of confidence in U.S. policymakers. In turn, this has led to intensifying dollar weakness as well as a steady rise in UST yields at the long end. This has become the overarching theme across global markets and is likely to continue this week.
Fed officials are starting to quantify the potential impact of the tariffs. New York Fed President Williams said Friday that he expects “increased tariffs to boost inflation this year to somewhere between 3-1/2 and 4 percent.” If so, the Fed is unlikely to deliver the 75 bp of cuts currently priced in by Fed Funds futures this year. The market is pricing in only 25% odds of a May cut, rising to nearly 90% for June. Looking ahead, the swaps market is pricing in 75-100 bp of total easing over the next 12 months. Waller, Harker, and Bostic speak today. All are expected to espouse the wait and see approach that has become Fed consensus.
March New York Fed inflation expectations will be reported. In February, the survey reinforced the case that progress on inflation is stalling above 2%. Inflation expectations for one, three, and five years ahead are all close to 3%. The timelier University of Michigan consumer inflation expectations survey suggests long-term inflation expectations are becoming unanchored. Inflation expectations 5-10 years out surged to 4.4% in April, the highest since June 1991. This will complicate the Fed’s job of bringing about disinflation without a significant slowing of the economy.
EUROPE/MIDDLE EAST/AFRICA
The euro continues to benefit from dollar weakness. On Friday, the euro trade at the highest level since February 2022 near $1.1475 and was just shy of that month’s high near $1.1495. However, clean break above the $1.1275 level (the 62% retracement objective of the 2021-2022 drop) sets up a test of the January 2021 high near $1.2350. The latest CFTC data through April 8 show that net non-commercial euro longs increased to nearly 60k, still well below recent highs from 2023, while net yen longs increased to 147k, the highest on record dating back to the early 1990s.
ASIA
China reported strong March new loan and aggregate financing over the weekend. New loans came in at CNY3.641 trln vs. CNY3.0 trln expected and CNY1.0 trln in February, while aggregate financing came in at CNY5.888 trln vs. CNY4.959 trln expected and CNY2.238 trln in February. We expect stimulus measures to pick up as policymakers act to help offset the headwinds from the trade war. However, we also continue to expect authorities to continue leaning against excessive yuan weakness.
China trade surplus widened more than expected in March. The surplus increased to $102.64 bln vs. $75.15 bln expected and $31.72 bln in February. Exports soared 12.4% y/y vs. -3.0% in February as exporters front-ran the tariffs, while imports fell -4.3% y/y vs. 1.5% in February. Going forward, the trade war is bound to be a drag on China’s external sector.
Monetary Authority of Singapore loosened policy again. For the second straight meeting, the MAS loosened policy by reducing “slightly” the slope of its S$NEER trading band whilst keeping the width and midpoint unchanged. It noted that “There are downside risks to Singapore’s economic outlook stemming from episodes of financial market volatility and a sharper-than-expected fall in final demand abroad. A more abrupt or persistent weakening in global trade will have significant ramifications on Singapore’s trade-related sectors, and in turn, the broader economy.” The MAS cut its core inflation forecast to average 0.5–1.5% in 2025 vs. 1.0–2.0% in January, and cut its growth forecast for this year to 0-2% vs. 1-3% in January.
The downside risk to Singapore’s economy may already be materializing. Q1 GDP data was reported at the same time. Growth came at 3.8% y/y vs. 4.5% expected and 5.0% in Q4, while the q/q rate came in at -0.8% vs. -0.4% expected and 0.5% in Q4.
