Investing.com - The U.S. dollar edged higher Friday amid growing expectations that a government shutdown can be averted, while the euro handed back recent gains amid concerns a global trade war risks a sharp regional economic downturn.
At 05:15 ET (09:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher to 103.982, moving further away from Tuesday’s trough of 103.21, its lowest since mid-October.
U.S. government shutdown unlikely
The greenback has fallen more than 4% so far this year, retreating from the six-month high seen in January, as the uncertainty surrounding the Trump administration’s trade policies raised fears of a U.S. recession.
A potential U.S. government shutdown added to uncertainties, although top U.S. Senate Democrat Chuck Schumer on Thursday said he would vote to advance a Republican stopgap funding bill.
“While that may be seen as an excuse for a mild uptick in US equities [and the dollar], there are much bigger forces in play - such as the path for tariffs and whether subdued U.S. consumer and business sentiment is going to weigh on real activity,” said analysts at ING, in a note.
The focus Friday is likely to be on the release of the Michigan consumer sentiment index for March later in the session.
“These readings have fallen quite sharply over the last two months and any further large drop could weigh on the dollar today,” ING added.
Euro retreats from five-month peak
In Europe, EUR/USD traded marginally lower at 1.0851, sliding further from Tuesday’s five-month peak as the EU-U.S. trade spat rattled traders and after Germany struggled to pass a massive spending proposal.
Morgan Stanley (NYSE:MS) FX strategists say there may be potential for EUR/USD to rally to as high as 1.12 following significant fiscal announcements from Germany.
However. ING warned that EUR/USD upside appetite appears to be fading.
“There seems little love lost between European and US leadership currently, and next month’s reciprocal trade tariffs could see Europe hit hard,” ING said.
At the same time, the market is focusing on developments in the German lower house, the Bundestag, as German politicians discuss constitutional debt-brake reform and the massive infrastructure package.
“There could be a lot more noise to be had in these negotiations as the Greens try to secure key concessions ahead of a crucial vote next Tuesday. Any headlines that the Greens are refusing to back the bill stand to hit EUR/USD intra-day,” ING added.
GBP/USD fell 0.1% to 1.2937, retreating from Wednesday’s four-month high after growth data showed the U.K. economy contracted in January.
Data released earlier Friday by the Office for National Statistics showed that U.K. gross domestic product contracted by 0.1% in January - a sharp drop from the 0.4% growth seen in December, and below the 0.1% growth that had been expected.
The Bank of England cut interest rates in early February by 25 basis points, and further economic weakness could prompt more monetary easing even as the U.K.’s latest inflation data showed CPI inflation running at 3.0%, a full percentage point above target.
Yen weakens on rate hike doubts
In Asia, USD/JPY gained 0.8% to 148.95, with the Japanese yen hit by a local media report that suggested the Bank of Japan is in no rush to raise rates in May.
The yen had been benefiting of late from persistent bets on more interest rate hikes by the Japanese central bank.
USD/CNY traded 0.2% lower to 7.2306, with the yuan helped by China’s central bank, the People’s Bank of China, announcing plans to implement additional monetary tools aimed at stimulating growth.
These measures include potential interest rate cuts and maintaining the stability of the yuan amid a challenging global economic environment.