Foreign Exchange Commentary

Summary

• Canadian dollar flat after Bank of Canada interest rate cut, metals tariffs.
• Euro currency gains from weekly low as EUR/SEK rises 0.6% to 11.0540, highest since March 5^th.
• President Trump says U.S. to retaliate if EU tariffs not removed immediately.
• U.S. February Producer Prices rise 3.2% year-over-year; estimate +3.3%.
• Treasuries softer as U.S. 10-year yield touches 4.35 % this morning.
• U.S. equity sentiment sours recently on tariff fallout uncertainty.
• U.K. pound sterling supported by weak dollar, British interest rate view.
• Japanese yen climbs, JGB’s fall on signs of improving wages; Japan registers second-largest purchase of foreign bonds.
• Mexico peso strengthens best level of 2025 as U.S. Trade Secretary Luttnick praised Mexico from refraining in retaliatory tariffs.
• Australian dollar to weaken in coming months on faster RBA cut: Commerzbank. New Zealand annual net immigration slowed, but higher.
• U.S. jobless claims fall 2,000 to 220,000 in week ending March 8^th; estimate +225,000.

Noteworthy

• U.S. Dollar Climbs 2^nd Day After Suffering Broadly Recently; Yen Outshines
• U.S. CPI and PPI Well Behaved This Week

The euro currency could weaken in the near-term after its recent rally on U.S. growth concerns and optimism over Germany’s fiscal spending plans, Commerzbank analyst Michael Pfister says in a note.  “The market has got a bit ahead of itself in its current assessment.” The U.S. is unlikely to enter a recession as some market participants fear, he says.

Rather, growth should remain “quite strong” this year.  Furthermore, Germany’s fiscal stimulus proposal probably won’t have an effect on the economy until next year at the earliest, he says.  Commerzbank expects the euro to fall to $1.05 by the end of the second quarter from $1.0857 currently as of this writing (earlier this week the euro touched $1.0947).

The euro currency is unlikely to rise materially even if Russia agrees to a proposed 30-day ceasefire with Ukraine or if German Chancellor-in-waiting Friedrich Merz’s spending package is approved, ING analyst Francesco Pesole says in a note.  A Ukraine peace deal is largely priced in, he says. Furthermore, the terms of a truce would need to be weighed against longer-term implications for Ukraine and the EU, he says. Markets are also almost fully pricing in an official multi-party agreement in Germany for increased defense and infrastructure spending, he says.  “Our view for the remainder of March remains that a decline to $1.080 is more likely than another rally to $1.10 in the euro.”

Meanwhile, U.K. pound sterling could come under pressure given growing risks that U.K. Treasury chief Rachel Reeves underwhelms markets with her budget on March 26, Monex Europe analysts say in a note.  “Given the U.K.’s challenging fiscal position, a degree of radicalism is needed,” they say.  Reports suggests a more measured approach, however, and “that is likely to disappoint sterling traders on balance.”  Reeves is expected to announce spending cuts as the recent rise in U.K. government bond yields put further strain on public finances.  The Office for Budget Responsibility said Wednesday its fiscal forecasts are based on U.K. borrowing costs in the 10 working days to February 12.  Although firming significantly this week the pound sterling has remained below $1.30 thus far.

The risk of a U.S. government shutdown could weaken the dollar given the currency’s sensitivity to the U.S. economic outlook, ING analyst Francesco Pesole says in a note.  Senate Minority Leader Chuck Schumer said Democrats would block a government funding bill that would avert a government shutdown this weekend. The proposed alternative is an interim funding plan until April 11 but that would simply postpone a key risk for markets, Pesole says.  “That risk does not emerge very clearly in an FX market that is still readjusting after very wide moves.”  However, it’s still a negative development for the dollar after recent declines on U.S. growth concerns, he says.

President Trump is imposing a slew of new import tariffs, promising they will help slash the trade deficit, revive U.S. manufacturing and even stem the flow of migrants and fentanyl over the southern and northern borders. Some proposals have taken effect while others are on ice during negotiations. 

Here’s where things stand:

Canada and Mexico
A 25% import tariff on goods from Mexico and Canada took effect March 4, with an exception for energy products and potash, which received a 10% tariff. 

The next day, the Trump administration suspended until April 2 the tariffs on autos that are eligible for duty-free trade under the U.S.-Mexico-Canada Agreement, or USMCA.  On March 6, all goods compliant with USMCA received the same suspension.  Many goods entering the U.S. don’t comply with USMCA and are therefore subject to the new tariffs. 

Canada greeted news of the exemption by saying it wouldn’t proceed with $87 billion in retaliatory tariffs it had planned for late March but left in place $21 billion in tariffs on items including fruits and vegetables, appliances and liquor. On March 10, Ontario imposed a 25% surcharge on all electricity exports to the U.S. before withdrawing it, and some provinces have halted sales and imports of U.S. alcoholic drinks. Canada also said it would tariff an additional $20.6 billion in U.S. imported goods, in response to the steel and aluminum tariffs.

Mexico initially planned retaliatory measures but didn’t enact them. 

China
On Feb. 3, the Trump administration imposed an extra 10% tariff on goods from China, on top of the various tariffs levied during the Biden and first Trump administrations.  China retaliated with a 15% tariff on U.S. coal and liquefied natural gas and a 10% tariff on crude oil, agricultural machinery and other products, all taking effect Feb. 10. 

On March 3, Trump again hiked tariffs on Chinese goods by an additional 10%. China again retaliated, with tariffs that took effect March 10, including an additional 15% tariff on U.S. chicken, wheat, corn and cotton and an additional 10% tariff on sorghum, soybeans, pork, beef, seafood, fruits, vegetables and dairy products. China also punished 15 American companies by restricting exports to them. 

Steel and Aluminum
The Trump administration imposed 25% tariffs on all steel and aluminum imports on March 12.

The European Union responded with 50% import tariffs on American whiskey, motorcycles and motorboats starting April 1, and additional tariffs beginning in mid-April on American chewing gum, poultry, soybeans and other goods.

In response to Trump’s steel and aluminum tariffs, Canada on March 12 said it would impose a levy on an additional $20.6 billion in U.S. imported goods. On March 13, Trump responded to the EU by threatening 200% tariffs on alcohol from the EU.

The European Union
Trump has threatened but not enacted a 25% tariff on goods from the bloc. But the EU retaliated against U.S. steel and aluminum tariffs with a host of tariffs that take effect in April. In response, Trump on March 13 threatened to impose 200% tariffs on alcohol from the EU.

On March 4, Trump said the U.S. would impose so-called reciprocal tariffs on April 2 on any trading partner that charges tariffs or imposes other trade barriers on U.S. products. The reciprocal tariffs will match those of the trading partner, Trump said, noting that the levies would apply to the European Union, China, India, Mexico and Canada.  Actual implementation of the tariffs is expected to take longer, however—six months or more from the March announcement date.

Copper and Lumber
On March 4, Trump said he planned to impose an extra 25% tariff on imported copper and lumber.

Cars, Drugs and Microchips
On Feb. 18, Trump said he was considering tariffs of 25% or more on automobiles, semiconductors and pharmaceutical products.