By Kevin Buckland and Stefano Rebaudo
(Reuters) – The euro edged towards its highest level in over six months on Friday, following its biggest daily rise in almost three years the day before, as investors weighed the impact of U.S. tariffs.
The U.S. dollar was slightly higher while the safe-haven yen strengthened toward a six-month peak and the risk-sensitive Australian and New Zealand dollars plunged.
Traders boosted bets on central bank rate cuts as they expect trade duties to damage global growth.
They priced in an European Central Bank depo rate at 1.77% in December – implying almost three rate cuts – from 1.9% late Wednesday. The depo rate is at 2.5%.
They also predict four quarter-point interest rate cuts from the Federal Reserve in the remainder of this year, and reduced the odds of further Bank of Japan tightening to 8 bps.
“Our economists estimate that these tariffs could reduce U.S. GDP growth this year by as much as 2 percentage points, while adding up to 3 percentage points to U.S. inflation,” said Luca Paolini, chief strategist at Pictet Asset Management.
“This alone may be enough to push the U.S. into recession.”
The dollar index, a measure of the currency against a basket of six major peers, plunged 1.9% on Thursday, its worst day since November 2022, and was up 0.05% in the latest session.
Deutsche Bank warned on Thursday of the risk of a crisis of confidence in the U.S. dollar, saying major shifts in capital flow allocations could take over from currency fundamentals and spark disorderly currency moves.
The dollar hit a 6-month low versus the Swiss Franc at 0.8521 and was last down 0.5% at 0.8548.
Markets await the release of a monthly U.S. payrolls report later in the day that will offer clues to the health of the economy and the outlook for monetary easing.
The euro rose 0.10% to $1.1064, after jumping 1.8% – its biggest daily rise since November 2022 – as high as $1.1147 on Thursday, a level not seen since September 30.
Shockwaves from Trump’s tariffs were rippling through markets more than 24 hours after being unveiled.
Japanese banks dived on Friday and stocks globally extended a punishing selloff, helping to drive a rally in U.S. Treasuries and supporting gold near a record peak.
As Chinese markets observed a national holiday on Friday, the dollar slid 0.5% to 7.2450 yuan in offshore trade, its lowest since March 20. On Thursday, it had leapt as much as 0.7% to a two-month high at 7.3485.
The Australian dollar, which often acts as a liquid proxy for the yuan, as well as being a barometer of risk sentiment, dropped 1.36% to $0.6241. Similarly, the New Zealand dollar plunged 1.26% to $0.5720.
