Apr 9, 2025
The dollar falls as the trade conflict between the U.S. and China escalates.
The U.S. dollar fell sharply on Wednesday after President Donald Trump increased tariffs on China, raising concerns about a prolonged trade conflict and a potential recession in the U.S.
At 04:10 ET (08:10 GMT), the Dollar Index, which measures the dollar against a basket of six other currencies, decreased by 0.4% to 102.277, after dropping to levels not seen since September 2024 earlier in the day.
The dollar suffered due to Trump's announcement on Tuesday of an additional 50% tariffs on Chinese imports, raising the total U.S. tariffs on China to 104%. This move was retaliation for China’s implementation of 34% tariffs against U.S. goods last week.
Such developments have heightened fears of an economic downturn in the U.S., which could lead the Federal Reserve to enact more rate cuts, putting further pressure on the dollar.
Futures for Fed funds indicated the expectation of about 111 basis points in cuts for this year by Wednesday, up from 92 basis points at the start of Tuesday.
"One reason the dollar is taking a hit from the increased tariffs on China is that the markets believe there are few immediate alternatives for certain Chinese goods, creating greater inflationary and recessionary threats for the U.S. Meanwhile, the negative effects on Chinese exporters from these tariffs are diminishing," analysts at ING noted.
Goldman Sachs analysts added that the markets might still be undercounting the risks of a significant recession in the U.S. due to the marked increase in tariffs on Chinese products.
"We believe there is a considerable likelihood that we will move towards pricing in a full recession, which would mean weaker stock markets, wider credit spreads, an extended period of rate cuts by the Fed, and higher volatility in longer-dated equity markets," they stated.
In Europe, the EUR/USD rose by 0.6% to 1.1025, moving closer to last week’s high of 1.1147.
The euro has gained support from news that Germany’s conservative party has reached an agreement with the centre-left Social Democrats to establish a government, alleviating political uncertainties in the EU's largest economy.
"The euro is well positioned to gain from any crisis of confidence in the USD, given that it is the second most liquid currency globally, and a favored alternative to the dollar for foreign exchange reserves. Domestic sluggish growth is typical for the euro but unusual for the dollar, which may lead to a greater negative impact on the dollar from recession fears," ING noted.
The GBP/USD rose by 0.3% to 1.2800, recovering from a recent one-month low as the dollar weakened.
However, increasing concerns regarding the U.K.’s economic outlook have restricted the pound’s recovery potential.
Markets have also fully anticipated a rate cut during the Bank of England's May meeting, with some even suggesting a 50 basis-point reduction.
In Asia, the USD/JPY fell by 0.5% to 145.53, remaining close to a recent six-month low.
The yen has seen support from safe haven buying, and traders found some comfort in Japan sending representatives for trade discussions with the Trump administration.
The USD/CNY increased by 0.2% to 7.3498, as the Chinese yuan slid to its weakest point since November 2007.
The yuan's decline followed five consecutive days of a weaker midpoint fixing set by the People's Bank of China, as Beijing prepares for an intensified trade conflict with the United States.
At 04:10 ET (08:10 GMT), the Dollar Index, which measures the dollar against a basket of six other currencies, decreased by 0.4% to 102.277, after dropping to levels not seen since September 2024 earlier in the day.
The dollar suffered due to Trump's announcement on Tuesday of an additional 50% tariffs on Chinese imports, raising the total U.S. tariffs on China to 104%. This move was retaliation for China’s implementation of 34% tariffs against U.S. goods last week.
Such developments have heightened fears of an economic downturn in the U.S., which could lead the Federal Reserve to enact more rate cuts, putting further pressure on the dollar.
Futures for Fed funds indicated the expectation of about 111 basis points in cuts for this year by Wednesday, up from 92 basis points at the start of Tuesday.
"One reason the dollar is taking a hit from the increased tariffs on China is that the markets believe there are few immediate alternatives for certain Chinese goods, creating greater inflationary and recessionary threats for the U.S. Meanwhile, the negative effects on Chinese exporters from these tariffs are diminishing," analysts at ING noted.
Goldman Sachs analysts added that the markets might still be undercounting the risks of a significant recession in the U.S. due to the marked increase in tariffs on Chinese products.
"We believe there is a considerable likelihood that we will move towards pricing in a full recession, which would mean weaker stock markets, wider credit spreads, an extended period of rate cuts by the Fed, and higher volatility in longer-dated equity markets," they stated.
In Europe, the EUR/USD rose by 0.6% to 1.1025, moving closer to last week’s high of 1.1147.
The euro has gained support from news that Germany’s conservative party has reached an agreement with the centre-left Social Democrats to establish a government, alleviating political uncertainties in the EU's largest economy.
"The euro is well positioned to gain from any crisis of confidence in the USD, given that it is the second most liquid currency globally, and a favored alternative to the dollar for foreign exchange reserves. Domestic sluggish growth is typical for the euro but unusual for the dollar, which may lead to a greater negative impact on the dollar from recession fears," ING noted.
The GBP/USD rose by 0.3% to 1.2800, recovering from a recent one-month low as the dollar weakened.
However, increasing concerns regarding the U.K.’s economic outlook have restricted the pound’s recovery potential.
Markets have also fully anticipated a rate cut during the Bank of England's May meeting, with some even suggesting a 50 basis-point reduction.
In Asia, the USD/JPY fell by 0.5% to 145.53, remaining close to a recent six-month low.
The yen has seen support from safe haven buying, and traders found some comfort in Japan sending representatives for trade discussions with the Trump administration.
The USD/CNY increased by 0.2% to 7.3498, as the Chinese yuan slid to its weakest point since November 2007.
The yuan's decline followed five consecutive days of a weaker midpoint fixing set by the People's Bank of China, as Beijing prepares for an intensified trade conflict with the United States.