The U.S. dollar dropped for a second straight day Friday, as fears over trade wars prompted investors to dump the greenback after President Donald Trump said the U.S. will impose tariffs on steel and aluminum imports next week.
Meanwhile, Japan’s yen rallied, also to the dollar’s detriment, as Bank of Japan Gov. Haruhiko Kuroda said his central bank would start thinking about exiting its quantitative-easing program in 2019.for friday columns
What were currencies doing?
The ICE U.S. Dollar Index DXY, -0.29% was down 0.4% at 89.942, building on a 0.3% loss from Thursday, which was its first decline in three sessions. For the week, however, the index is marginally positive, on track for a 0.1% gain.
The broader WSJ U.S. Dollar Index BUXX, -0.27% was off 0.3% at 83.73, but posted a 0.1% gain on the week.
The Japanese yen USDJPY, -0.47% jumped to its highest level since November 2016 against the dollar, with the greenback falling to ¥105.72 from ¥106.24 on Thursday, according to FactSet data. The yen rose 1.1% on the week.
The Swiss franc USDCHF, -0.4035% thought to be a haven during times of uncertainty, just as the yen, strengthened against the buck, with one dollar last buying 0.9372 franc, compared with 0.9418 franc. On the week the dollar-Swiss pair was little changed, with the franc slipping 0.1%.
The pound GBPUSD, +0.1815% bought $1.3790, up from $1.3777 late Thursday in New York, after falling to a session low of $1.3756. On the week, sterling was up 1.3%.
The euro EURUSD, +0.4320% rose to $1.2327, compared with $1.2268 on Thursday, gaining 0.2% on the week.
Against the Canadian dollar USDCAD, +0.3583% the greenback strengthened, buying C$1.2872 versus C$1.2838 late Thursday. While Canada is in focus regarding U.S. trade policies, which is weighing on the Canadian currency, its GDP by industry in December also undercut consensus expectations. On the week, the greenback gained 1.9% against its Canadian rival.
Read: Tariffs raise the odds of U.S. terminating Nafta, says Goldman Sachs
Also check out: Trump tariff plans rattle key commodity currencies
What was driving the markets?
The dollar weakness was a continuation of the downbeat mood that started Thursday after Trump said he would sign orders next week imposing a 25% tariff on steel imports and a 10% tariff on aluminum. “Trade wars are good, and easy to win,” Trump said on Twitter early Friday.
Read: Here’s why the stock market took the Trump tariff announcement so hard
Other countries may now retaliate by imposing their own trade tariffs, which could hurt U.S. exports and slow down economic growth, which would hurt the dollar.
On Friday, Canada, the European Union, Mexico, China and Brazil had already said they were weighing up countermeasures, according to media reports. European Commission President Jean-Claude Juncker said he would take the matter to the World Trade Organization.
In Japan, BOJ Gov. Kuroda said inflation was on track to reach the central bank’s 2% target in fiscal 2019, adding that it would be natural for policy makers to consider an exit from its aggressive easing program. Japan’s 2019 fiscal year starts in April of next year. Tighter monetary policy usually boosts a country’s currency and the yen on Friday rallied on the comments.
In the U.K., Theresa May outlined her plan for trade relations with the EU following the completion of Britain’s exit from the union.
Meanwhile in Europe, a trio of political risks were on the agenda. Later Friday, U.K. Prime Minister Theresa May is due to lay out her much anticipated plan for trade with the EU after Brexit. May said, among other things, that the U.K. wasn’t looking for passporting right for financial services companies, which would allow them to operate in the EU, but also that the U.K. wasn’t looking for tariffs or quotas in its trade with the continent. The pound, which held steady for much of the speech but did pare its gains in the end. It later found support again as the U.S. dollar sold off further.
See: 3 key takeaways from Theresa May’s landmark Brexit speech
This weekend, euro investors will focus on two major political events on this Sunday: The Italian general election and the result from Germany’s center-left Social Democratic Party’s vote on whether to join a grand coalition with Chancellor Angela Merkel’s center-right Christian Democratic Union.
Analysts said any surprises from either event could spark a period of political uncertainty in the currency union and drive the euro lower.
Read: Here’s why this is the most important weekend on Europe’s political calendar
What were strategists saying?
“Tariffs are bad for general trade and the economy. The U.S. is already running a huge trade deficit and protectionism is not the way to improve it as it generally deteriorates economic conditions,” said Richard Perry, market analyst at Hantec Markets, in emailed comments.
“They may reduce imports but it will also reduce exports, meaning that economic growth is reduced and this would impact negatively on the dollar. It is a very myopic reaction to combating a trade deficit,” he added.
On the pound and May’s speech, David Lamb, head of dealing at FEXCO Corporate Payments said: “Despite the Prime Minister’s best efforts, at times her speech sounded more wishlist than line in the sand.”
“But of greatest concern for the markets was the Prime Minister’s acknowledgment — for the first time — that leaving the single market will result in a reduction of British businesses’ access to EU markets. For all the optimistic talk of new beginnings, this stark reminder of the potential economic cost of Brexit sent a shiver down the spine of pound watchers, triggering a further fall in sterling,” Lamb added.
What was on the economic calendar?
Consumer sentiment came in at 99.7, underperforming the MarketWatch consensus estimate of 100. Still the indicator was at its second-highest level since 2004.