USD Rises on Inflation Fears, Trade War Risks, and Interest Rate Differentials

Today's expected range for the Canadian Dollar against the major currencies:

US Dollar        1.4240-1.4460

Euro                 1.4860-1.5080

Sterling            1.7600-1.7830

WTI Oil (opening level) $75.93

The CAD is opening at 1.4346 ( 0.6970 )

The US dollar is rising because of fear that Trump's policies might spur inflation at best and trigger an all-out trade war at worst.

In addition, the US economy is outperforming most of its peers so the Fed is highly likely to ease its monetary policy at a much slower pace compared to other countries. A recent Bloomberg survey forecasts a modest 1% growth for the Euro Area this year, slightly better than the 0.8% projected for 2024 but well below the long-term average of 1.4%. It is no surprise that the market continues to expect three or four 25-basis point rate cuts by the European Central Bank (ECB) in 2025 compared with just one or two by the Fed over the same period. 

It is hard to expect Europe, UK and Canada to rebound substantially from recent lows, as rate cuts in these countires are greater than the USA.

Remember, it all boils down to widening interest rate differentials between the USA and all the other major economies!

Headlines

·    US President Trump moved to freeze more than USD 300 billion in green infrastructure spending authorized by the Biden administration, leaving projects in limbo

·    Trump announced support for Stargate, a USD 100 billion AI infrastructure project that will be largely funded by Open AI, Oracle and Japan’s Softbank, touting the creation of 100,000 jobs related to the project.

·    Trump said he could impose 10% across the board tariffs on Chinese imports on February 1, which dented risk sentiment in the Asian session.

·    Equities: US rally on milder tariffs, Netflix +14%, HSI falls on China tariffs

·    Volatility: VIX 15.06 (-4.74%), lower futures, AI options active, tariff uncertainty lingers

·    Digital Assets: Bitcoin $105,494 (-0.5%), Solana +2.81%, crypto stocks mixed

·    Currencies: USD weakened yesterday, but firmed slightly overnight on Trump tariff comments

·    Commodities: Grains and precious metals the initial Trump 2.0 winners

·    Fixed Income: US yield curve bear flattens as short yields rise