Dollar set for fifth monthly drop on trade, fiscal uncertainty

CNBC

30-05-2025

The U.S. dollar wobbled on Friday en route to its fifth-straight monthly decline as traders braced for further uncertainty around trade policy and U.S. fiscal health, while awaiting pivotal inflation reports later in the day.
The greenback had a choppy week, ending lower in the previous session after a federal court temporarily reinstated the most sweeping of President Donald Trump's tariffs, just a day after another court had ordered an immediate block on them.
Trump said on Thursday he hoped the Supreme Court would overturn the trade court's decision, while officials also indicated that they could employ other presidential powers to ensure the tariffs take effect.
The uncertainty around tariffs has exerted a vice-like grip on markets as investors flee U.S. assets in a search for alternatives, worried that Trump's erratic policies could challenge the strength and outperformance of U.S. markets.
"The news is making the U.S. a less attractive place for foreign investors to go," said Kit Juckes, chief FX strategist at Societe Generale.
This will not stop money from flowing there, Juckes said, but investors will be looking for more attractive incentives such as a slightly weaker currency or high yields.
On Friday, the euro was slightly lower at $1.1331, ahead of German inflation data for May while the Swiss franc was little changed at 0.8243 per dollar.
The U.S. currency, though, was set for monthly declines against the Swiss franc, the euro and the pound.
Thursday's weekly jobless claims and economic growth data did little to placate worries of a U.S. economic downturn. Investor focus will be on the Federal Reserve's preferred inflation data - the personal consumption expenditure (PCE) report - later on Friday.
Worries about fiscal debt levels in developed economies, highlighted by weak appetite for freshly issued, longer-dated credit in the U.S. and in Japan, have also weighed.
The dollar index, which tracks the U.S. unit against a basket of six other currencies, was 0.3% higher at 99.56. The index was set for a decline of 0.10% in May, its fifth straight month in the red.
On the flip side, markets have taken note of emerging market assets. An index tracking emerging market currencies has gained about 2% for the month - its biggest one-month rise since November 2023.
The Japanese yen was little changed at 144.05 per dollar after data showed underlying inflation in Tokyo hit a more than two-year high in May, keeping alive the chances of further interest rate hikes from the Bank of Japan.
"The BOJ is in a difficult position," said Min Joo Kang, senior economist at ING. "Inflationary pressures remain hot, while the economic recovery remains fragile - and facing strong headwinds from U.S. tariffs."
However, the yen is on track for its first monthly decline against the dollar this year.
Markets are also on the lookout for clues on highly anticipated trade deals as the Trump-mandated July 9 deadline for implementation of tariffs draws near.
The U.S. PCE data is likely to show that inflation rose 2.2% in April, according to economists polled by Reuters, compared with a 2.3% increase in March.
The Fed tracks the PCE price measures for its 2% inflation target. Economists are forecasting a surge in inflation this year as the Trump administration's import duties raise the cost of goods.
"The danger is the next piece of news on, for example, the tariff impact on import prices", which however would come later in the year, Juckes said.
Elsewhere, the Australian dollar slid to $0.6421, while the New Zealand dollar was last bought at $0.5961.