Dollar Weakens Despite Hawkish Fed And Fresh Tariff Warnings

(RTTNews) - The U.S. Dollar retreated against major currencies during the week ended February 21 despite fresh tariff warnings and a tone of caution in the Fed minutes released during the week. The U.S. Dollar retreated against the British pound, the Australian Dollar as well as the Japanese yen but held firm against the euro. The 6-currency Dollar Index also edged down during the week.

The holiday-shortened week began with fresh tariff warnings from President Trump. According to Reuters, U.S. President Donald Trump said on Tuesday that he intends to impose auto tariffs "in the neighborhood of 25%" and similar duties on semiconductors and pharmaceutical imports, the latest in a series of measures threatening to upend international trade. The comments triggered a spike in bond yields and a strengthening of the U.S. Dollar.

The dollar strengthened further with the cautious tone in the minutes of the Federal Open Markets Committee released on Wednesday. The minutes revealed an elevated uncertainty regarding the scope, timing, and potential economic effects of possible changes to trade, immigration, fiscal, and regulatory policies on the Fed's monetary policy outlook.

The minutes revealed that participants generally pointed out the upside risks to the inflation outlook. Members noted that though inflation had eased significantly over the past two years, the progress towards the Committee's 2 percent longer-run goal had slowed over the past year. Many participants emphasized that additional evidence of continued disinflation would be needed to support the view that inflation was returning sustainably to 2 percent. The renewed focus on inflationary pressures contained in the FOMC minutes ensured that Fed rate cut expectations remained weak, lifting the Dollar Index to the week's high of 107.38.

The Dollar however tumbled to the week's low of 106.33 on Thursday in the backdrop of a Fed official's concerns over the employment outlook. Raphael Bostic, President and Chief Executive Officer of the Federal Reserve Bank of Atlanta in an essay published on Thursday placed on record his concerns about potential vulnerabilities in the labor market.

Though Bostic viewed the employment outlook as stable, he acknowledged that signs of slowing are accumulating. Relying on data from the U.S. Bureau of Labor Statistics. he cited the lower probabilities for unemployed workers to find jobs and the longer average stint of unemployment as an indication of clear softening in the labor market. He also pointed out that the "quits rate," the percentage of all workers who voluntarily leave a job in a given month had declined to levels last seen in 2015, excluding the pandemic years.

Bostic also raised concerns about the narrowing employment growth as three key sectors viz healthcare and social assistance, leisure and hospitality, and government accounted for roughly three-quarters of job growth in the past year versus about 45 percent in the pre-pandemic years.

The U.S. dollar strengthened on Friday as investors digested the tariff threats from President Donald Trump. Geopolitical concerns also contributed to safe haven demand, allowing the greenback to rebound to 106.61. The index had closed at 106.71 a week earlier implying a weekly decline of 0.09 percent.

The euro declined 0.31 percent against the U.S. dollar during the week ended February 21 amidst concerns about the impact of U.S. tariffs on growth in the Euro Area. Dragged down by the prevailing political and economic uncertainty, the EUR/USD pair which had closed at 1.0491 on February 14 slipped to 1.0458 by February 21. The pair traded between a high of 1.0507 recorded on both Monday and Friday and the low of 1.0401 recorded on Wednesday.

The British pound however rallied against the U.S. Dollar, with the GBP/USD pair adding 0.36 percent during the week ended February 21 amidst an unexpected acceleration in inflation. The pound sterling closed on February 21 at $1.2630, versus $1.2585 a week earlier. The pair which had fallen to the weekly low of 1.2562 on Wednesday climbed to the weekly high of 1.2681 by Friday. Data released during the week had shown inflation vastly higher than expected, unemployment lower than expected, a slight improvement in consumer confidence and retail sales that surpassed market expectations.

The AUD/USD pair recorded an increase of 0.08 percent during the week ended February 21. From the closing level of 0.6350 on February 14, the pair increased to 0.6355 by February 21. The currency pair's movements came amidst the Reserve Bank of Australia reducing rates as widely expected but warning that the battle against inflation was not over yet. The RBA also hinted at a cautious stance on further monetary policy easing. The pair's trading ranged between the low of 0.6327 on Thursday and the high of 0.6410 on Friday.

In the past week, the USD/JPY pair slipped close to 2 percent, dropping to 149.29 by February 21, from 152.33 a week earlier. The pair traded between the high of 152.41 on Monday and the low of 148.92 on Friday. Data released on Friday had showed that Japan's headline inflation jumped to 4 percent, the highest since January 2023 and core inflation touched 3.2 percent, a level last seen in June 2023. However, as rate hike expectations lifted bond yields to levels last seen in November 2009, Bank of Japan's Governor stepped in to warn of increased bond buying to counter the spike in government bond yields.

All eyes are now on the major data releases on the horizon. The GFK Consumer Confidence reading from Germany is due on Wednesday. Durable Goods orders and the second estimate of fourth quarter GDP readings are due from the U.S. on Thursday. Inflation readings from the France and Germany are also anticipated in the week. Nevertheless, the spotlight is on the Fed-preferred PCE-based inflation readings due from the U.S. on Friday.

Amidst the anxiety, the Dollar Index has increased to 106.64. The EUR/USD pair has increased to 1.0462 whereas the GBP/USD pair has slipped 1.2622. The AUD/USD pair has in the meanwhile dropped to 0.6351. The USD/JPY pair has strengthened to 149.47.