Dollar falters amid tariff fears
The foreign exchange market is currently facing considerable volatility, particularly involving the US Dollar (USD), Euro (EUR), and British Pound (GBP). This instability has been largely sparked by the recent announcement of wide-ranging tariffs by former U.S. President Donald Trump, which has fuelled concerns of a looming global trade war and a potential economic downturn.
The USD has seen a notable decline in reaction to the new tariff measures. The dollar index recorded its sharpest fall since November 2022, dropping by 1.9% on Thursday, followed by a further 0.3% decrease on Friday. This slump is attributed to investor anxiety over the broader economic impact of the tariffs, which has led to a significant reassessment of the U.S. Federal Reserve's monetary policy outlook. Market expectations now point towards four quarter-point interest rate cuts in 2025.
EU Condemns U.S. tariffs as euro strengthens across markets
Ursula von der Leyen, President of the European Commission, expressed regret over the United States’ decision to introduce additional tariffs, warning that the move would likely fuel inflation. She further cautioned that the European Union would consider retaliatory measures should ongoing negotiations fail to yield a resolution.
Von der Leyen emphasised that tariffs were not the answer, even if certain countries were indeed violating trade rules, as claimed by former President Donald Trump. She expressed hope that there remained time to advance discussions on trade between the EU and the U.S.
The EUR has gained ground against the weakening dollar, appreciating by 2.4% as investors pivot towards more stable currencies. This upward movement signals eroding confidence in U.S. financial and economic stability, prompting a reallocation of capital into the euro. The euro also rallied across other currency pairs. Both the AUD/EUR and NZD/EUR dropped to new five-year lows, while the EUR/USD reached its highest level in 21 months. Before Wednesday’s announcement, the EUR/USD pair had already climbed above 1.0860, with the euro continuing to strengthen as yield differentials narrowed and pressure built on U.S. interest rates.
Similarly, the GBP has strengthened relative to the USD. Historically, April has tended to be a mildly positive month for the GBP/USD pair, with an average return of 0.31% over the last five decades. March witnessed an impressive rally in the pair, climbing over 4%, buoyed by fiscal stimulus in Europe and intensifying concerns over the U.S. economic outlook.
Overall, the FX landscape is currently defined by a weakening US Dollar and strengthening Euro and Pound, as shifting trade dynamics and heightened uncertainty weigh on investor sentiment.
