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The architects of the new US foreign economic policy expected dollar appreciation to absorb some of the cost of US tariffs and for some exporters to cut prices. Instead, the dollar has mostly fallen against the major currencies.

Last week, the greenback recorded new lows for the year against the Chinese yuan, Mexican peso, euro, sterling, the Japanese yen, the Swedish krona, and the Norwegian krone. Beijing acted forcefully against Walmart's attempt to force deeper deflation on China's producers to avoid losing market share and increasing prices in the US.

The risk of partial federal US government shutdown was minimized, but, in some ways, it may set the stage for a larger confrontation later. Similarly, while the winter storms in January may be exaggerating the slowing of the US economy in the near-term, the medium-term outlook is fraught with risk. The combination of uncertainty (tariffs and response) and certainty (federal government layoffs and cooling of immigration) appears to be stalling corporate investment decisions, undermining consumer confidence, and may be dampening discretionary consumption.

Still, the US real sector data (retail sales, industrial output, and housing starts) should be consistent with expanding activity in February. The Federal Reserve can be expected to reiterate Chair Powell's recent comments about the economy being strong enough to allow it to be patient until a clearer picture emerges.

The Bank of England, Sweden's Riksbank, and the Bank of Japan are set to meet, and they will likely not do anything. The BOE will keep the door open to further cuts, while the BOJ could start looking at additional hikes. The Riksbank may finish easing before Norway's Norges Bank even begins.

The Swiss National Bank is expected to take another step back to the zero-bound by cutting its deposit rate to 0.25% from 0.50%. Germany's new fiscal initiative and government is taking shape. China may announce new initiatives on Monday to support domestic demand. 

United States

Drivers: Worries about growth have increased in the US, which, at this juncture, continue to seem somewhat exaggerated, though we think economic weakness is still to come. This, coupled with the fiscal response from Europe, has tarnished the US exceptionalism meme. More tariff threats are possible, and the reciprocal tariffs and auto sector action are expected in early April.

Data: The January data was skewed by winter storms and efforts to get ahead of the threatened US tariffs. We expect the February real sector data to show an improved picture, with a recovery in retail sales and housing starts, as well as continued growth in industrial output.

The manufacturing sector added 10,000 workers in February after losing 15,000 in the previous two months. Last year, the US lost over 100,000 manufacturing jobs while manufacturing output was flat. Still, the highlight next week is the FOMC meeting.

There is no doubt that it will standpat. The Summary of Economic Projections, the dot plot, will be updated. Therein lies most of the interest. Fed Chair Powell spoke on March 7. His comments suggested that while the economy is sufficiently strong, there is still warrant to be cautious amid the heightened uncertainty. Last December, the median dot anticipated two rate cuts this year. It may not have changed much in the past three months. 

Prices: The Dollar Index made a marginal new high for the week before the weekend near the 104.10 mark, but it continued to meet sellers. It has failed to settle above the 104.00 level since March 6. Last week's low was near the 103.20 mark, its lowest since mid-October 2024. The momentum indicators are stretched, but they do not seem to rule out new lows. 

Eurozone

Drivers: The fiscal response to the US shift is still evolving, but the direction of travel is clear, even if more details need to be worked out. Still, it looks like a German agreement is at hand, and a vote under the previous parliament configuration is possible. The European interest rate discount to the US has narrowed, and this is supportive for the euro. European equities are outperforming the US after Europeans bought a record amount of US shares in 2024. The dramatic price action in exchange rates and asset prices may spur new portfolio allocation decisions. 

Data: The economic data will seem dated given the fiscal developments, and in any event, do not typically shift the market or sway central bank officials. The highlights include January trade and current account balances surplus, and Germany's ZEW survey. The German assessment of the current economic situation fell in the last five months of 2024 but has risen in the first two months of 2025. However, it is still lower than all but November-December last year.

The expectations component jumped in February to 26.0 (from 10.3 in January). That is the most optimistic since last July. Separately, the Swiss National Bank is to meet. Disinflationary forces may give officials the scope to bring the deposit rate to 0.25%. If the recent weakening of the franc against the euro can be sustained, this cut could be the last in the cycle for the SNB, barring a new shock. 

Prices: The euro reached almost $1.0950 last week, its best level since last October. It pulled back but held above the $1.08 mark, giving the consolidation a bullish feel. The $1.10 area is of psychological interest while the 2024 peak from last September was near the $1.1215 level. The euro rose by about 0.40% last week. This was only the second time since last August it strung together back-to-back weekly gains. 

China

Drivers: The yuan remains closely managed, and Chinese officials obtained relative stability through formal and informal mechanisms. Three-month implied volatility is about 5.1%. It briefly traded below 5% in late February, for the first time since last August. To put it in perspective, leaving aside the Hong Kong dollar, among emerging market currencies, the Indian rupee (~3.9%) and the Philippine peso (~5.2%) are the only ones lower. 

Data: With the February CPI and PPI reported last week, attention has turned to real sector data. The way China reports its data (e.g., year-to-date, year-over-year) makes it difficult to assess, especially given the limited January data. The 20% increase in US tariffs cannot be helpful even if China's exports to the US have fallen as a percentage of its overall trade and GDP.

In February 2024, industrial output rose 7.0% year-to-date, year-over-year. It looks to be around 5.3% this year. Retail sales rose 5.5% in February 2024 year-to-date, year-over-year, and looks to have slowed below 4% this year. Beijing needs to provide more stimulus if its economic targets of around 5% growth and 2% inflation are to be achieved. An announcement is also expected on Monday that may propose new initiatives to boost domestic demand. 

Prices: Chinese officials show no sign of trying to blunt the 20% US tariff hike with currency depreciation. They have also blocked efforts by Walmart to try to get the local producers to eat the tariff (by lowering their prices). The yuan has appreciated so far this year, and Chinese stocks are among the strongest performers here in Q1.

The dollar traded at a marginal new low for the year last week against the onshore yuan (~CNY7.2160) and offshore yuan (~CNH7.2155). Given the continued pressure on the greenback more broadly, the risk is on the downside. It has not traded below the CNH7.20 mark since last November. 

Japan

Drivers: Often the changes in the yen's exchange rate are more correlated with changes in the US 10-year Treasury yield than the differential with Japan. However, now the differential is slightly more correlated over the past 30 sessions (~0.59 vs 0.56). The changes in dollar-yen have also become more correlated with the Dollar Index. The rolling 30-day correlation had fallen to around 0.20 in mid-February, the lowest since June 2022, but is now near 0.40, a little lower still from where it ended last year.

Meanwhile, the swaps market has almost a 75% chance of the next BOJ rate hike in July, but it is not fully discounted until October. The July meeting (July 31) takes place a few days after the upper house election for half of the 248 seats (July 27). At the end of last week, Prime Minister Ishida admitted to distributing gift vouchers to members of the Diet. This appears to have further weakened his hand as he leads the first minority government. 

Data: Japan is set to report February's trade balance. Without fail, for the past 20 years, it has improved sequentially over the course of January. The January deficit was a blow out of nearly JPY2.74 trillion, the largest since August 2022, which itself was the largest since January 2014.

The February CPI is due, but the signal has already come from the Tokyo CPI, which was released at the end of February. As government subsidies for household energy were renewed, headline inflation is likely to fall from 4.0% in January to around 3.6% in February. The core measure dipped below 3% from 3.2%. The measure, which excludes fresh food and energy, may be broadly stable at around 2.5%.

The Bank of Japan meeting concludes on March 19. While standing pat, Governor Ueda is likely to reiterate that if the economy performs as expected, it anticipates it will be able to raise rates further. The overnight target is at 0.50%, and the swaps market sees a peak near 1.20%. 

Prices: After recording the low early last week (~JPY146.55), the dollar recovered to about JPY149.20 in the middle of the week. It consolidated in a JPY141.40-JPY149.00 range for the most part in the past two sessions. The greenback traded firmly and posted its highest close in seven sessions.

The 20-day moving average is near the JPY149.30 level, and the dollar has not settled above it in two months. From its high on Jan. 10 (~JPY158.85) to last week's low, the dollar has fallen by about 7.75%. The momentum indicators are over-extended, as one would imagine, and look poised to move higher.

United Kingdom

Drivers: Sterling is benefiting from the broad decline in the US dollar. The rolling 30-day correlation of changes can be seen in the Dollar Index, and sterling is near 0.75 compared with less than 0.50 around the middle of February. Growth impulses are faint.

The UK economy unexpectedly contracted by 0.1% in January, though exceptionally poor weather seems to have taken a toll as it did in the US. The UK two-year premium over the US reached a four-month high earlier this month at a little more than 25 bp, but it looks poised to narrow. As recently as mid-February, the US offered a 15 bp premium over the UK. 

Data: Although there is a high-frequency economic report nearly every day in the week ahead, the labor market report on March 20 stands out. Elevated wage growth seemed to deter MPC members from backing Mann's vote for a 50 bp cut in February. The Bank of England meets several hours after the labor market report. Here, too, there is practically no chance of a back-to-back rate cut. The swaps market has about an 80% chance of a cut in May. Between now and the end of the year, the market has discounted two cuts fully, and about 20% of a third. 

Prices: Sterling proved itself to be resilient last week. It barely reacted to the unexpected contraction in January’s GDP, which was reported before the weekend. As it did on Thursday and Friday, it has remained within Wednesday's range (~$1.2915-$1.2990).

The momentum indicators are stretched from the 7.3% rally seen over the past two months. They do not rule out marginal new highs, and the next area of resistance is seen in the $1.3000-$1.3050 range, but the move is long in the tooth. It may take a break of the $1.2860 area, last week's low, to confirm a top is in place, but we suspect a close below the $1.2900 level would be a preliminary indication of it. 

Canada

Drivers: Canada has a new prime minister, and the Bank of Canada reacted to the downside risks posed by the US tariffs and threats by cutting rates again. As one of his last acts as prime minister, Trudeau announced a CAD6.5 billion (~$4.5 billion) program to support businesses that will be hurt by US tariffs, including exporters and agribusiness.

We did not expect this fiscal support by the outgoing minority government. Still, there seems to be ample fiscal space as the budget deficit was projected by the OECD to fall to 1.3% this year from 2.0% in 2024. Still, despite the US flip-flops, Canada remains vulnerable to more tariffs in the coming weeks. 

Data: The week begins with January's portfolio flow report. In 2024, foreign investors bought a net average of CAD16 billion a month of Canadian bonds and stocks. This is the most seen in three years. The Toronto Stock Exchange Composite Index rose by 3.25% in January, and the 10-year yield fell by 16 bp.

However, it is the February CPI to which the market may be the most sensitive. Canadian CPI has fallen for the last six months. The subdued price pressure gives the central bank latitude to respond to economic shocks. The swaps market has another cut discounted by July, and more than an 85% chance of a cut later in the year.

At the end of the week, January retail sales will be reported. December's 2.5% surge was flattered by the temporary sales tax holiday (Dec. 14-Feb. 15). StatsCan warns that January nominal retail sales fell by 0.4%. Still, the economy does appear to be slowing, and the tariffs (real and threatened) are significant headwinds. The median forecast in Bloomberg's survey is for the economy to slow to 1.6% annualized pace in Q1 25, which would be the slowest since Q4 23. 

Prices: The Canadian dollar was practically flat last week, which puts it at about 0.12% higher so far here in Q1 25. It remains the poorest-performing G10 currency this year. The price action is choppy, and the lack of visibility saps any lingering conviction.

For the past three months, the greenback has traded in a range of about CAD1.4150-CAD1.4600, with the notable exception being Feb. 3. Most of that seems to have taken place between about the CAD1.4250 and CAD1.4520 levels. Given the outstanding US threats, the trade situation may not see much clarification for several more weeks. 

Australia

Drivers: We have noted the increased correlation between the changes in the Australian dollar's exchange rate and the Canadian dollar. The rolling 30-day correlation is near 0.80, the upper end of where it has been in the past eight months. It is a little more than the inverse correlation with the changes in the Dollar Index. While the Canadian dollar is the worst performer among the G10 currencies this quarter, the Australian dollar is the second worst with a 2.2% gain.

Data: There is one report next week: The February employment data on Thursday. January's report was robust. Australia filled 54.1,000 full-time posts, the most since last July. In January 2024, full-time employment rose less than 8,000 and in January 2023, it lost nearly 12,000 full-time jobs. Still, the unemployment rate ticked up to 4.1% in January from 4.0% in December. Australia's unemployment rate has been in a 3.9%-4.1% range since last August. Last February, it stood at 3.7%.

Partly, this is a function of the increased participation rate. It was at 66.5% in January 2024 and 67.3% in January 2025. The central bank meets on April 1, and there is practically no chance of a change in the 4.10% target rate. 

Prices: The Australian dollar has traded broadly sideways for the past week and a half. It has been confined to about $0.6260 to $0.6360. With better-performing Chinese markets, ostensibly in anticipation of stronger economic activity, and hopes for better US February data, there looks to be scope for Aussie gains. Last month's high was near the $0.6415 mark, a Fibonacci retracement target. It can be retested, and a break could open the door to another cent gain. That said, a break of the lower end of the range would need to be respected. 

Mexico

Drivers: The Mexican peso has appreciated by about 4.5% this year against the dollar, including the gains ahead of the weekend that carried it to its best level in four months. This is a considerably stronger performance than that of the Canadian dollar, but Mexico does not appear to be in Washington's crosshairs like Canada is. Mexico's high overnight interest rates (9.50% vs. Canada's 2.75%) make speculative sales more expensive.

Despite President Sheinbaum's strong support ratings, the economy is slowing, and the central bank is expected to cut rates by another 50 bp when it meets on March 27. The peso remains vulnerable to US tariff threats, but the spike in early March (~MXN21.00) was less than the spike seen in February (~MXN21.2930). Given the on-again, off-again nature of the US tariffs, it may encourage more opportunistic tactics by market participants. US Customs officials reported that January fentanyl shipments seized on the US-Mexico border fell by 40% in February (month-over-month) to the lowest since December 2021. 

Data: Mexico's economic calendar is light on market moving reports. Ahead of the central bank meeting, it will have the first half of March CPI in hand, January IGAE, which is similar to a monthly GDP estimate, January retail sales, and February's trade figures. 

Prices: The dollar traded below the MXN19.85 level before the weekend. It has not been lower since last Nov. 8, three days after the US election and a day after the FOMC cut rates. The November low was near the MXN19.75 mark. The 200-day moving average is around the MXN19.6830 level, and the dollar has not closed below it in nine months.

The momentum indicators are over-extended, and the greenback settled below its lower Bollinger Band (~MXN20.0160) for the first time since last April. The dollar also settled at new lows for the month against the Brazilian real near the BRL5.7420 level. It fell to BRL5.7120 ahead of the weekend. Last month's low was closer to the BRL5.6755 area.

The firmer inflation reading earlier in the week underscores the central bank's commitment to lift the Selic Rate by another 100 bp when it meets on March 19 (to 14.25%). That will be the third consecutive 100 bp increase. The swaps market anticipates two more half-point increases this year.

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