By Yadarisa Shabong and Kevin Buckland
(Reuters) – The dollar struggled to lift off a five-month low against major peers on Wednesday, as traders digested tit-for-tat U.S.-EU tariffs and a potential Russia-Ukraine ceasefire, while awaiting U.S. inflation data amid worries about the economy.
President Donald Trump’s unpredictable announcements on trade policy have whipsawed markets and drawn tariff retaliation from trading partners, ramping up a global trade war.
The European Union will impose counter tariffs on 26 billion euros ($28.39 billion) worth of U.S. goods from April, the European Commission said on Wednesday, in response to blanket U.S. tariffs on steel and aluminium that came into force earlier in the day.
“There’s so many, so many moving parts,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
The euro eased after hitting a five-month peak of $1.0947 on Tuesday as Ukraine said it was ready to support Washington’s proposal for a 30-day ceasefire with Russia. The ball is now in Moscow’s court.
“We’re not seeing any safe haven in European assets this morning because of retaliation of the trade war,” Broux added.
The euro traded at $1.0917 in early European trading.
Europe’s single currency was already flying high on the promise of massive fiscal spending by Germany, although the situation has become more complex after the Greens vowed to block those plans and unveiled rival proposals.
That remains the “overarching story” for the euro, Broux said.
SOURCE OF VOLATILITY
The Canadian dollar was steady after a volatile session on Tuesday, when Trump pledged to double tariffs on steel and aluminium to 50%, only to reverse course just hours later.
The Bank of Canada decides policy later on Wednesday, with traders expecting another quarter-point interest rate cut.
The greenback was steady at C$1.4439, after swinging between gains of 0.5% and losses of 0.4% on Tuesday.
“Trade uncertainty persists and therefore so does market volatility,” said Kyle Rodda, senior financial markets analyst at Capital.com.
“The U.S. growth outlook continues to deteriorate,” Rodda added, pointing to increased attention on the release of the consumer price index (CPI) later in the day, which he warned “could be a significant source of volatility”.
The U.S. dollar index, which measures the currency against a basket of six major peers, edged up 0.03% to 103.48 in early European trading hours, following Tuesday’s slide of 0.46% that took it its lowest since October 16.
A run of softer U.S. economic data continued on Tuesday with small-business confidence dropping for a third straight month in February.
Investors have been on edge since Trump avoided ruling out the possibility that a recession would result from his trade policies in an interview on Sunday with Fox News.
Wednesday’s CPI report may be setting the market up for “a lose-lose situation”, said Julien Lafargue, chief market strategist at Barclays Private Bank.
“A higher-than-expected reading could fuel the stagflation narrative while a weaker-than-expected print could cement recession fears,” Lafargue said.
“What the market really needs at this point is better visibility on growth rather than on inflation.”
The United States also resumed military aid and intelligence with Kyiv.
Increased optimism for an end to the war in Ukraine lifted the Swiss franc, which firmed as much as 0.8840 per dollar before paring gains.
Sterling eased at $1.2939, following Tuesday’s rally of 0.53% to $1.2947.
The dollar gained 0.5% to 148.485 yen , after sinking to a five-month trough at 146.545 yen in the prior session.
“We’re waiting for Friday for these trade union agreements in Japan,” Broux said, calling the dollar’s strength against the yen despite tighter bond spreads on Wednesday “a bit of a mystery”.
Many of Japan’s biggest companies have met union demands for substantial wage hikes for a third consecutive year, seeking to help workers cope with inflation and retain staff amid labour shortages. But it’s unclear whether the hikes will be strong enough to spur consumer spending and encourage the Bank of Japan to increase its policy rate, still at a low 0.5%, more aggressively.
($1 = 0.9158 euros)
(Reporting by Yadarisa Shabong in Bengaluru and Kevin Buckland in Tokyo; Editing by Jacqueline Wong, Clarence Fernandez and Kim Coghill)
