U.S. Dollar Slides Lower as Trade War Concerns Ease

TOKYO (Reuters) - The U.S. dollar plunged to an eight-week low against the yen and remained near a one-month trough versus sterling on Thursday as investors eased concerns over an inflation-stoking global trade war.

Yen Strength Ensured by Rate Hike Expectations

Japan's currency gained support from rising expectations of further Bank of Japan interest rate hikes, with a central bank official advocating for continued increases just a day after strong wage data was released.

Sterling Strength Despite Rate Cut Speculation

Sterling remained firm despite widespread predictions of a quarter-point rate cut by the Bank of England later in the day.

Dollar Declines

The dollar dropped 0.5% to 151.81 yen by 0140 GMT, marking its lowest level since December 12, extending a 1.1% decline from Wednesday. Sterling hovered around $1.2509 after reaching $1.2550 in the previous session, its highest level since January 7. The euro stabilized at $1.0401 after a 0.2% increase on Wednesday.

Dollar Index Weakened by Trade Relief

The dollar index, which measures the U.S. currency against the euro, sterling, yen, and three other major currencies, stood at 107.57, close to its overnight low of 107.29. The index had surged to a three-week high of 109.88 earlier in the week as President Trump threatened to impose tariffs on Mexico and Canada, but last-minute reprieves were granted. However, 10% tariffs on China remain in place.

Outlook for Major Currencies

The offshore yuan gained marginally to 7.2775 per dollar. Canada's loonie remained steady at C$1.4321 against the U.S. dollar after reaching a high of C$1.4270 overnight. The Mexican peso held its position at 20.5789 per dollar.

Market Sentiment

"The market seems to have shrugged off the tariff threats against Mexico and Canada and sees the China tariffs as routine," commented James Kniveton, a senior corporate FX dealer at Convera. "Two (U.S.) rate cuts are still anticipated by the end of the year, but the reduced risk of inflation from tariffs gives the Federal Reserve more flexibility."

Payrolls Data and Interest Rate Decisions

The next key event for U.S. monetary policy is the monthly payrolls report on Friday. Markets fully expect a quarter-point Fed cut in July and anticipate up to 46.3 percentage points of cuts by December, according to LSEG data. Meanwhile, the market implies a 92% probability of an imminent BoE rate cut. For the BOJ, the market estimates a 94.8% chance of a quarter-point hike by September.

BOJ Policy

BOJ board member Naoki Tamura stated on Thursday that the central bank must raise rates to at least 1% by the second half of fiscal 2025 due to rising price pressures. The statement follows data showing a second consecutive month of real wage growth.