Last week, the forex market experienced significant volatility, primarily driven by geopolitical developments and economic data releases. Here’s a detailed recap of the major events and their impacts on currency markets during this period:
U.S. Tariff Announcements and Trade Tensions
On February 3, U.S. President Donald Trump announced new tariffs on imports from Canada, Mexico, and China, escalating trade tensions and introducing uncertainty into global markets. The initial announcement included a 25% tariff on steel and aluminum imports, which was later deferred for Canada and Mexico for at least a month.
However, the 10% tariff on Chinese goods remained in effect. These developments led to fluctuations in currency values, with the U.S. dollar initially strengthening against the Mexican peso and Canadian dollar, followed by reversals once delays were announced.
Currency Market Reactions
- Indian Rupee (INR): The INR faced significant pressure, reaching a lifetime low against the U.S. dollar earlier in the week. Despite the Reserve Bank of India’s interest rate cut on February 7, intended to stimulate the economy, the rupee continued to struggle due to global trade war fears and persistent foreign portfolio outflows. It ended the week with a decline of nearly 1%, marking its worst weekly performance since December 2022.
- Chinese Yuan (CNY): The yuan depreciated amid renewed Sino-U.S. trade tensions, with the offshore yuan trading at 7.2892 per dollar. China implemented tariffs on U.S. imports, and President Trump expressed no urgency to negotiate with President Xi Jinping, contributing to the yuan’s weakness.
- Euro (EUR): The euro faced downward pressure, with some forex strategists predicting it could fall to parity or below against the U.S. dollar. This expectation was driven by the dollar’s strength, bolstered by higher U.S. bond yields and strong economic growth.
U.S. Economic Data
On February 7, the U.S. Labor Department released its employment report, showing that nonfarm payrolls increased by 143,000 jobs in January, a slowdown from the previous month’s upwardly revised 307,000. The unemployment rate edged down to 4.0%. This mixed data provided the Federal Reserve with flexibility to hold off on interest rate cuts until at least June, influencing currency valuations.
Market Volatility and Investor Sentiment
The week was characterized by heightened market volatility, with currencies reacting to the evolving trade landscape and economic indicators. The U.S. dollar experienced fluctuations, initially strengthening due to tariff announcements and later adjusting as markets digested the implications of the delayed tariffs and mixed economic data. Investor sentiment remained cautious, with a focus on the potential for a global trade war and its impact on economic growth and inflation.
In summary, the forex market between February 3 and February 7, 2025, was marked by significant movements influenced by geopolitical events, trade tensions, and economic data releases. The interplay between these factors led to notable volatility across major currencies, reflecting the complex and dynamic nature of the global financial landscape during this period.
