U.S. Dollar Rises Amid Trade Tensions And Economic Uncertainty

The U.S. dollar gained ground on Friday, with the euro falling further from a five-month high, as global markets were rocked by escalating trade tensions and growing concerns about a potential economic downturn.

The volatility in financial markets deepened after U.S. President Donald Trump threatened to impose a 200% tariff on European wine, cognac, and other alcoholic imports. This came on the heels of the European Union’s (EU) announcement that it would levy tariffs on American whiskey and other products starting next month. The EU’s decision was a direct response to Trump’s recent imposition of a 25% tariff on steel and aluminum imports, which went into effect earlier this week.

The intensifying trade dispute between the U.S. and its European allies has sparked growing uncertainty, amplifying fears of a sharp global economic slowdown. These fears were reflected in the markets, with the S&P 500 index falling into correction territory on Thursday as investors flocked to U.S. Treasuries and other safe-haven assets.

The euro dropped to $1.0847, continuing its decline from Tuesday’s five-month peak. The currency was further pressured by the EU-U.S. trade clash and political instability in Germany, where the government struggled to pass a large-scale spending proposal.

Compounding the negative market sentiment was the fading hope for an imminent ceasefire between Ukraine and Russia. Russia expressed support for the U.S. peace proposal but indicated that significant revisions would be necessary before any agreement could be reached.

The euro’s decline pushed the U.S. dollar further from its recent low of 103.21, its weakest level since mid-October, although concerns about the economic outlook in both the U.S. and globally lingered.

Tony Sycamore, a market analyst at IG, highlighted the uncertainty clouding market sentiment, stating, “The million-dollar question with whatever asset class you’re looking at is…where do we start to find the news that’s going to turn around risk sentiment? And at this point in time, it’s not clear.”

After hitting a six-month peak in January, the dollar had lost more than 5% of its value, weakening against the euro, pound, and yen as the narrative of U.S. economic exceptionalism began to wane.

The potential for a U.S. government shutdown added to the uncertainty, though U.S. Senate Majority Leader Chuck Schumer signaled on Thursday that his party would provide the votes needed to pass a stopgap funding bill, averting the shutdown.

The British pound fluctuated around $1.2945, awaiting the release of the U.K.’s January GDP data. The pound had previously slipped from Wednesday’s high of $1.2990, its strongest level against the dollar since early November.

Meanwhile, the Japanese yen pulled back slightly on Friday, with the dollar trading at 148.32 yen, up 0.35%. The yen had earlier strengthened to 146.545 per dollar, driven by safe-haven demand and expectations that the Bank of Japan (BOJ) would raise interest rates later in the year. Market participants were also eyeing the results of Japan’s spring wage negotiations, which could encourage the BOJ to continue normalizing monetary policy.

Economists expect the BOJ to stand pat at its meeting next week as it assesses global economic risks.

The U.S. dollar index, which tracks the greenback against a basket of currencies, including the euro and yen, rose 0.1% to 103.95, marking its third consecutive day of gains.

The Canadian dollar remained weak at 1.4440 per U.S. dollar, caught in the crossfire of the trade conflict, while the Australian dollar steadied at $0.6284 after Thursday’s decline. The New Zealand dollar gained 0.1% to $0.5702.

In the cryptocurrency market, bitcoin saw a modest increase of 1.32%, trading at $81,410.36.