Dollar edges higher amid slowing inflation and trade war

The dollar index edged up to 103.5 on Wednesday but remained near four-month lows as traders assessed the economic outlook and the implications of President Trump’s trade policies. While the dollar saw modest gains, investor sentiment remained cautious amid growing uncertainty over global trade dynamics and their potential impact on U.S. growth.

Dollar edges higher amid slowing inflation and trade war

President Trump sought to downplay fears of an economic downturn, characterizing the current phase as a "period of transition" rather than a recession. However, trade tensions intensified as the U.S. imposed a 25% tariff on steel and aluminum imports from key trading partners, including Canada, Australia, and the European Union. In response, the EU announced it would implement retaliatory tariffs on €26 billion worth of American goods starting in April, escalating fears of a broader trade conflict. Market participants remain concerned that prolonged trade disputes could weigh on global economic activity and impact currency markets.

Inflation slowed more than expected

In addition to trade policy developments, investors are closely watching the slowing Consumer Price Index (CPI), which will offer fresh insights into inflation trends. Analysts are particularly focused on whether new tariffs are already contributing to upward price pressures, which could influence future Federal Reserve policy decisions. The dollar strengthened the most against the Japanese yen, reflecting diverging monetary policy expectations between the Federal Reserve and the Bank of Japan. However, it was slightly weaker against the euro, as European Central Bank officials signaled a more cautious approach to interest rate adjustments. With ongoing geopolitical uncertainties and key economic data releases ahead, traders are bracing for potential volatility in currency markets.