The Euro approached its highest level in more than six months on Friday, following its largest daily gain in nearly three years the previous day, as investors assessed the effects of US tariffs.
The single currency gained 0.10%, reaching $1.1064, after surging 1.8% on Thursday, its largest daily increase since November 2022, peaking at $1.1147, a level not seen since 30th September.
The US Dollar saw a modest increase, while the safe-haven Yen strengthened toward a six-month high, and the risk-sensitive Australian and New Zealand Dollars dropped sharply.
Traders raised their expectations for central bank rate cuts, anticipating that trade tariffs could hurt global growth.
Traders have priced in a European Central Bank deposit rate of 1.77% by December, implying nearly three rate cuts from the current 2.5%, down from 1.9% late Wednesday.
They also forecast four quarter-point interest rate cuts by the Federal Reserve for the rest of the year and lowered the chances of further tightening by the Bank of Japan to just 8 basis points, Reuters reports.
“Our economists estimate that these tariffs could reduce US GDP growth this year by as much as 2 percentage points, while adding up to 3 percentage points to US inflation,” according to Luca Paolini, chief strategist at Pictet Asset Management.
“This alone may be enough to push the US into recession.”
The Dollar index, which tracks the currency against a basket of six major peers, dropped 1.9% on Thursday, its worst performance since November 2022, but was up 0.05% in the most recent session.
Deutsche Bank issued a warning on Thursday about the potential for a crisis of confidence in the US Dollar, noting that significant shifts in capital flow allocations could override currency fundamentals and trigger chaotic currency movements.
The Dollar fell to a six-month low against the Swiss Franc, reaching 0.8521, and was last down 0.5% at 0.8548 at the time of writing.
Markets are awaiting the release of the US payrolls report later on Friday, which is expected to provide insights into the economy’s health and the potential for monetary easing.
Furthermore, as Chinese markets were closed for a national holiday on Friday, the Dollar declined 0.5% to 7.2450 Yuan in offshore trade, its lowest level since 20th March. The previous day, it had surged as much as 0.7% to a two-month high of 7.3485.
Meanwhile, the Australian Dollar, often seen as a liquid proxy for the Yuan and a gauge of risk sentiment, fell 1.36% to $0.6241. Similarly, the New Zealand Dollar dropped 1.26% to $0.5720.
“I think Aussie is really starting to come around now to the scope of the tariffs on Australia’s largest trading partner,” stated Tony Sycamore, an analyst at IG.
“The situation is absolutely horrendous for China.”