Rate Hike Forecast Disappointment, China Trade War Fears Sink U.S. Dollar

The U.S. Dollar fell against a basket of currencies last week, driven lower by a less-hawkish U.S. Federal Reserve and fears of a trade war after President Trump announced he would initiate sanctions against China.

June U.S. Dollar Index futures settled at 89.033, down 0.764 or -0.85%.

Fed Raises Benchmark Interest Rate

On March 21, the U.S. Federal Reserve raised rates for the sixth time since the policymaking Federal Open Market Committee (FOMC) began hiking rates off near-zero in December 2015. The widely expected move put the benchmark funds rate at a target of 1.5 percent to 1.75 percent.

The Fed also upgraded its economic forecast, and dropped hints that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years. The fact that traders were pricing in a 38-percent chance of four rates hikes probably led to dollar weakness.

Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.

Inflation expectations changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation.

Trump Slaps China with Tariffs

President Donald Trump signed an executive memorandum on March 22 that would impose retaliatory tariffs on up to $60 billion in Chinese imports.

The new measures are designed to penalize China for trade practices that the Trump Administration says involve stealing American companies’ intellectual property.

The dollar weakened on the fear that China is likely to retaliate against the tariffs by targeting U.S. agricultural products that are reliant on the Chinese export market.

In other news last week, U.S. Core Durable Goods Orders rose 1.2% versus an estimate of 0.5% and the previous read of -0.2%. Durable Goods Orders rose 3.1% versus a 1.6% forecast. Last month, the report came in at -3.6%.

Australian Dollar

The Australian Dollar finished lower last week, closing at .7694, down 0.0016 or -0.21%.

The Reserve Bank of Australia Meeting Minutes showed the central bank is not in a hurry to raise interest rates due to concerns over housing, consumer credit and low wages.

The Australian Employment Change showed the economy added 17.5K jobs in February, below the 19.8K estimate. The previous month’s figure was revised down to 12.5K. The Unemployment Rate rose 5.6%, above the 5.5% estimate.

New Zealand Dollar

Despite a dovish Reserve Bank of New Zealand interest rate decision and rate statement, as well as a possible negative impact on the economy due to sanctions against its trading partner China, the New Zealand Dollar managed to eke out a small gain for the week, finishing at .7231, up 0.0020 or +0.28%.

Most of the gains were attributed to a strong rally on March 21 that corresponded with the Fed’s less-hawkish monetary policy statement.

Japanese Yen

The Dollar/Yen declined last week as a sharp break in U.S. equity markets sent investors into the safety of the Japanese currency. The Forex pair reached its lowest level since the week-ending November 11, 2016.

The USD/JPY settled at 104.717, down 1.235 or -1.17%.