Trump walks back Fed attack, says China’s tariffs will drop

Dollar rebounds on easing Fed threats, China rhetoric

The US dollar rebounded against most of its major peers yesterday and continued to gain today. There was not a single catalyst for the dollar’s recovery, rather it was the result of a blend of headlines and developments.

The initial trigger were comments by US Treasury Secretary Scott Bessent, who said that although negotiations with China will likely be “a slog,” they will probably lead to a de-escalation of trade tensions between the world’s two biggest economies. Later in the day, US President Trump walked back his recent threats against Fed Chair Jerome Powell, saying that he has no plans to fire him. Referring to China, he said that if a trade deal is sealed, tariffs would fall significantly.

All these remarks were nothing but positive for the dollar. Not firing Powell means that interest rates may not be lowered as aggressively as they would have been in the case of replacement, while the comments on trade may have eased fears about a potential recession.

Yet, although investors somewhat scaled back their rate cut bets, they are still penciling in around 80bps worth of reductions by the end of the year. This means that they are far from believing that the worst is behind us and that a recession is off the cards. After all, the Atlanta Fed GDPNow model is still pointing to contraction for the first quarter of 2025.

Flash PMIs to reveal tariff related impact

With that in mind, investors today are likely to pay attention to the S&P Global flash PMIs for April for signs and clues on how the world’s biggest economy entered the second quarter. Anything suggesting that businesses have turned more cautious following the “Liberation Day” and the subsequent tariff-related developments could signal the end of the dollar’s recovery and the resumption of its prevailing downtrend.

The Eurozone has already published its own PMIs, with the composite dropping to 50.1 from 50.9, nearly signaling stagnation. At last week’s gathering, the ECB cut interest rates by 25bps and warned that the Eurozone economy could take a big hit from Trump’s tariff policies. This has prompted bets for even more aggressive easing this year, and following the PMIs, money markets are now pricing in another 65bps worth of reductions.

Wall Street recovers, but not out of the woods yet

On Wall Street, all three of its major indices traded in the green yesterday, gaining more than 2.5% each. Trump’s remarks that he would prefer finding common ground with China rather than extending the current trade conflict allowed investors to increase their risk exposure, which is also evident by the pullback in safe havens like gold, as well as the recovery in oil prices.

What’s more, 82 companies in the S&P 500 have already reported their earnings and 73% of them have beaten expectations, which may have been also a supportive factor for stock indices. That said, calling a bullish reversal on Wall Street now appears to be very unwise and premature. Trump has proven several times how unpredictable he can be. Thus, fresh headlines about hardening his stance again, or a lack of progress in talks with China, could revive fears and concerns, thereby prompting investors to flee out of equities in favor of safe havens.