Dollar gains at end of volatile week; sterling slips despite retail sales growth

Investing.com - The U.S. dollar rose Friday at the end of a volatile week, boosted by hopes for a degree of compromise in the trade war between the U.S. and China, the world’s two largest economies.

At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, climbed 0.3% to 99.415, after a sharp rebound from a three-year low in the previous session.

Dollar helped by potential trade compromise

The dollar traded higher, helped by a Bloomberg report indicating that China’s government is weighing the exemption of some U.S. goods from its 125% import tariffs, as the country grapples with the high economic cost of a trade war.

This followed U.S. President Donald Trump, earlier this week, hinting at potential trade negotiations with China, saying a potential deal could lead to a “substantial” reduction in tariffs. 

Additionally, the Wall Street Journal reported on Wednesday that the Trump administration was considering reducing tariffs on Chinese imports to de-escalate trade tensions.

“Even though Chinese self-interest may well be driving these developments, investors are still welcoming some flexibility here,” said analysts at ING, in a note.

The U.S. and China have become embroiled in a bitter, tit-for-tat tariff exchange this month, as Trump levied steep duties on Beijing in an apparent attempt to reduce Washington’s massive trade deficit. 

“The next big chapter here will be whether all this volatility has hit real world decisions - especially in the US jobs market. There is plenty of US jobs data released next week and any deterioration here could trigger another round of dollar losses,” ING added.

ECB to cut in June?

In Europe, EUR/USD traded 0.3% lower to 1.1361, with the single currency retreating further from the over three-year high seen at the start of the week.

European Central Bank policymaker Olli Rehn on Thursday played up the chance of an interest rate cut in June as the ECB’s new forecasts "may well" point to inflation falling too far.

The ECB cut rates for the seventh time in a year last week and warned that economic growth will take a big hit from U.S. tariffs, bolstering bets for even more monetary policy easing.

By contrast, the Federal Reserve held rates unchanged at its last meeting, with policymakers citing uncertainty caused by the Trump administration’s volatile trade policy.

A “further modest advance in U.S. equities could drag EUR/USD back to the 1.1250 area and it may be there - 1.1250 - where all the ’structural’ dollar sellers could re-emerge if you believe Washington’s destruction of the rules-based international order has permanently damaged the dollar’s status as the leading reserve currency,” said ING.

GBP/USD edged 0.3% lower to 1.3299, despite the release of a positive retail sales figure.

U.K. retail sales rose by 0.4% in March alone, after downwardly revised growth of 0.7% in February, an unexpected jump after economists had predicted a month-on-month fall of 0.3%.

For the first quarter as a whole, retail sales rose by 1.6% - the strongest reading in four years.

However, the storms are gathering, and Bank of England Governor Andrew Bailey said on Thursday he was focused on an expected shock to growth from Trump’s import tariffs and retaliatory measures by other countries.

Yen weakens despite inflation release 

In Asia, USD/JPY traded 0.6% higher to 143.44, despite data showing that Tokyo’s core inflation climbed to 3.4% year-on-year in April, up from 2.4% in March and above the 3.2% market consensus, driven by broad-based price gains in services and housing. 

The steady rise in inflation complicated the rate outlook for the Bank of Japan officials amid global uncertainty sparked by Trump tariffs.

USD/CNY traded marginally lower at 7.2866 in a muted session, following the Bloomberg report that indicated China’s government is weighing the exemption of some U.S. goods from its 125% import tariffs.