Dollar rebounds, but trade and debt worries remain

Investing.com - The U.S. dollar edged higher Tuesday, receiving some support as traders return from holidays in the U.K. and U.S., although concerns remain over the Trump administration’s uncertain trade policies as well as a sweeping tax and spending bill making its way through Congress.

At 05:40 ET (09:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, gained 0.4% to 99.285, near a one-month low after hefty losses last week.

Dollar under pressure

The dollar has been under pressure in recent months as investors’ confidence in U.S. assets has been hit by the uncertainty surrounding President Donald Trump’s global tariff policies.

The euro soared to a one-month high on Monday, when the U.S. was on holiday to commemorate Memorial Day, after Trump postponed backed down from threatened 50% duties on European Union shipments from June 1, sending the euro rallying to a one-month high.

“The renewed standoff between Trump and the EU is a reminder that tariff threats and delays can re-emerge quickly. If there’s a lesson from April, it’s that the dollar bears the brunt of tariff drama,” said analysts at ING, in a note.

Traders are also wary about latching onto the greenback while Trump’s tax-cut bill remains a live issue, given it is expected to substantially add to the debt pile in the world’s largest economy - a factor contributing to Moody’s downgrade of the U.S. sovereign credit rating earlier this month.

The U.S. House of Representatives last week passed a version of Trump’s tax-cut bill, and now it heads to the Senate where more heated debate is likely.

“For now, the best hope for the dollar is that incoming data calms recession worries. That’s needed, as deficit concerns are starting to shake the dollar’s already fragile footing,” ING added.

The economic data slate Tuesday includes numbers on durable goods, housing and consumer confidence on Tuesday, and there are also speeches from Minneapolis Federal Reserve President Neel Kashkari and New York Fed President John Williams to digest.

Euro retains underlying strength

In Europe, EUR/USD traded 0.3% lower to 1.1353, with the single currency slipping slightly after having traded nea  the highest level since the end of April. 

Despite these losses, the euro retains underlying support, helped by comments by ECB President Christine Lagarde on Monday.

The euro could become a viable alternative to the dollar, earning the 20-nation bloc immense benefits, if governments could only strengthen the bloc’s financial and security architecture, Lagarde said.

“If European policymakers continue to push the idea, we could see strategic long positions in the euro build even faster,” ING added.

Data released earlier Tuesday showed German consumer sentiment is set to improve again slightly heading into June.

The consumer sentiment index, published by GfK market research institute and the Nuremberg Institute for Market Decisions, rose by 0.9 points month on month to -19.9 points.

It was the overall indicator’s third monthly increase, even if the rate of recovery slowed heading into June.

GBP/USD fell 0.2% to 1.3543, after data showed that British shop prices fell slightly overall this month but food price inflation accelerated, according to a survey on Tuesday.

Overall shop prices fell by 0.1% in annual terms, as they did in April, the BRC said, as non-food prices declined at a faster rate.

However, food prices were up 2.8% in May in annual terms, compared with a 2.6% rise in April.

Yen gives up some of recent gains 

In Asia, USD/JPY traded 0.7% higher to 143.91, bouncing after sharp losses last week.

Bank of Japan Governor Kazuo Ueda said on Tuesday that the central bank was prepared to hike interest rates further if the Japanese economy continued to pick up. 

This comes as data last week showed Japanese core consumer inflation rose to an over two-year high in April. A recent round of strong wage hikes is also expected to boost inflation.

However, investors were cautious amid U.S. trade policies and uncertainty over potential trade talks.

Recent media reports showed that Japanese ministers will arrive in Washington in early June for a fourth round of trade talks.

USD/CNY traded 0.1% higher to 7.1924, in muted trading as uncertainty surrounding Trump’s trade policies kept investors cautious.