- Monfor Dealing Team
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Dollar climbs as trade hopes offset growth concerns
- Monfor Dealing Team
- News
Dollar strengthens despite economic headwinds and trade concerns
The US dollar extended its winning streak for a third consecutive day, buoyed by robust end-of-month buying activity, strong corporate earnings, and growing hopes that trade frictions may be easing. Investor sentiment has been lifted by President Trump’s recent remarks suggesting forthcoming trade agreements with India, Japan, and South Korea, along with continued optimism about reaching a deal with China. This shift in tone has lent support to the dollar, despite it recording its weakest monthly performance since late 2022—largely due to the growing momentum behind global moves to reduce reliance on the greenback.
However, the broader outlook for the US currency remains clouded by fresh economic data that point to increasing fragility. Figures released yesterday reveal that the US economy shrank by 0.3% in the first quarter of 2025—its first contraction since early 2022 and a marked reversal from the 2.4% growth seen in the previous quarter. A major contributor to the downturn was a dramatic 41.3% spike in imports, as companies rushed to secure goods ahead of expected tariff increases. This surge widened the trade deficit and led to a record 5 percentage point drag on GDP from net exports. Government expenditure also faltered, reducing growth by 0.25%—its first negative contribution in three years—while private sector spending fell significantly under the weight of growing uncertainty.
The rush to front-load imports, reminiscent of similar behaviour observed in previous tariff cycles, has further complicated the economic picture. These distortions have skewed headline indicators, exaggerating short-term volatility and making it harder to gauge the underlying health of the economy. While the downturn was broadly in line with expectations, the data underline persistent concerns about the direction of US economic growth.
The pace of consumer spending growth in the US slowed to just 1.8% in the first quarter of 2025—its weakest rate since the second quarter of 2023—highlighting growing pressure on household activity. This deceleration points to the likelihood of continued economic softness in the second quarter. The recent introduction of new tariffs on 2 April has yet to filter through into the economic data, but early signs suggest that consumers are already feeling the strain. The combination of trade policy uncertainty and a broader slowdown appears to be weighing increasingly heavily on domestic demand.
In addition, fresh inflation figures have given policymakers little reason for reassurance. The Federal Reserve’s preferred gauge of inflation—the Personal Consumption Expenditures (PCE) price index—rose by 2.3% year-on-year in March 2025. While this marks the slowest annual increase in five months, it still exceeded market expectations of a 2.2% rise. Compounding the picture, February’s reading was revised upwards to 2.7%. Although the pace of inflation is showing signs of cooling, the higher-than-expected print complicates the Federal Reserve’s policy calculus and has reignited concerns about stagflation, as slowing growth coincides with persistent price pressures.
Euro retreats from highs despite record-breaking April performance
April marked a historic milestone for the euro, delivering its strongest performance against the US dollar for that month since the euro’s introduction in 1999. However, gains proved fleeting as EUR/USD slipped below the $1.13 threshold this morning, following renewed optimism from President Trump over potential trade agreements with key international partners.
The revival in market confidence and growing belief that the worst of global trade tensions may have passed has put pressure on the euro in recent days. Interestingly, the single currency had been an unexpected beneficiary during earlier phases of trade uncertainty, favoured by investors as a relatively inexpensive and liquid alternative. Support has also come from the eurozone’s current account surplus and a notable fiscal boost from Germany’s landmark public spending initiatives. Although the euro has retreated from three-year highs, diverging economic signals from either side of the Atlantic continue to shape sentiment and may offer further scope for appreciation in the months ahead.
While the US economy unexpectedly contracted in the first quarter, shrinking by 0.3%, the eurozone expanded by 0.4%, fuelled by robust domestic consumption. Germany’s GDP grew by 0.2% as anticipated, while France recorded more modest growth of 0.1%.
Inflation dynamics within the euro area remain mixed. German headline inflation softened to 2.1% in April, though underlying price pressures ticked higher. In contrast, France’s annual inflation rate held steady at 0.8%. Financial markets are increasingly confident that the European Central Bank will ease policy further, with expectations currently pointing to a rate cut in June and a total of 67 basis points of reductions by the end of the year.