Market Brief: Dollar Slide Continues as Growth Differentials Shift

Markets are turning down ahead of the North American open as global bond yields ratchet higher and extreme levels of policy uncertainty cripple investment and spending decisions in the world’s largest economy, narrowing expected growth differentials across the major currency blocs. The trade-weighted dollar is down more than 2 percent on the week, ten-year Treasury yields are lagging their international rivals, and equity markets are setting up for a broad-based retreat after the bell.

The Trump administration yesterday said it would give automakers a one-month reprieve from the 25 percent tariffs that have been imposed on other imports from Canada and Mexico. The pause—apparently a response to pressure from firms including Ford, GM, and Stellantis, but also the logical consequence of a poorly-thought-out approach to integrated supply chains—contributed to a mild easing in exchange rate pressures, but left overall uncertainty at elevated levels.

The broader political calculus looks effectively unchanged. Leaders in Ottawa and Mexico City—Justin Trudeau, who is set to step aside after this weekend’s Liberal party vote, and Claudia Sheinbaum, with an almost-impregnable domestic political position—currently enjoy overwhelming support for retaliation against the United States, and it is clear that Trump is facing an entirely different response from businesses and consumers. This difference in relative pain thresholds suggests that the incremental “middle ground” strategy espoused by Commerce Secretary Howard Lutnick in recent interviews is unlikely to deliver gains at the negotiating table.

The euro’s gains are extending after the European Central Bank delivered a “hawkish cut” in this morning’s decision. Officials opted to cut rates for a sixth time, saying that the disinflation process “remains on track” with wage growth “moderating as expected” and profits “partially buffering the impact” on prices, but also noted that “Monetary policy is becoming meaningfully less restrictive as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up”. Traders are taking this to mean that policymakers see the euro area “neutral rate”—the theoretical level at which interest rates neither slow nor accelerate overall growth—moving closer to the central bank’s benchmark rates over the course of this year, reducing the need for further easing.

The decision comes as investors ratchet bloc-wide growth expectations higher in the aftermath of Germany’s decision to mobilise hundreds of billions of euros for defence and infrastructure investment. The common currency is up more than 4.5 percent this month against the dollar and looks set to take a run at the 1.10 threshold in the coming days as investors, businesses, and consumers turn more hopeful after a decades-long period of underinvestment by Teutonic governments. Major risks remain—particularly around the speed of implementation—but we suspect markets are ultimately taking the right view: a seismic shift has occurred within the European political landscape, and a reappraisal of long-term growth outcomes is entirely justified.

Data releases are painting a slightly more optimistic picture of the American economy. This morning’s update showed the number of Americans filing initial applications for unemployment benefits rose by less than forecast in the week ended March 1, with 221,000 claims filed against expectations for a print closer to the 233,000 mark. Continuing claims moved higher however, climbing to 1,897,000 in the prior week from 1,874,000 previously. Yesterday’s release from the Institute for Supply Management showed the services sector remaining largely immune from weakness in goods-producing industries, and anecdotal evidence provided in the Fed’s Beige Book survey suggested that tariff concerns are rising, but haven’t reached critical levels for most businesses.

Tomorrow’s non-farm payrolls report could play a critical role in determining if the US exceptionalism trade can recover. Consensus estimates collected by the major data providers suggest 160,000 jobs were added in February as employment in many Southern states bounced back from winter storms in the prior month—but with uncertainty rising, and schools and government agencies facing funding freezes under the expiration of pandemic-era support programmes, a downside miss is quite possible. The chart below, which does not incorporate the impact of Donald Trump’s executive orders but does include the extension of the 2017 Tax Cuts and Jobs Act, shows the net impact of state and federal government spending and taxes on the economy turning negative in the first quarter, adding to the headwinds facing growth throughout 2025 and 2026.

Please note: The morning Market Brief will be on hiatus between March 10 and March 21 as I take a badly-timed vacation. Try not to do anything that might trigger currency volatility. Thank you for your cooperation : )

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