The U.S. dollar continued its decline early Wednesday as mounting trade tensions with China weighed on investor confidence, while the British pound managed to climb despite softer-than-expected inflation data.
Trade Uncertainty Pressures the Dollar
Fresh concerns over the U.S.-China trade relationship have kept the dollar under pressure. President Donald Trump has launched a new probe into potential tariffs on critical mineral imports a sector dominated by Chinese exports signaling an escalation in the ongoing trade conflict.
Earlier this month, the White House announced a sweeping increase in tariffs on Chinese goods, now totaling 145%. Beijing swiftly retaliated with a 125% duty on U.S. exports.
Investors are closely watching upcoming U.S. Treasury data for February, expected to shed light on whether China has begun offloading U.S. assets amid the escalating trade war. Analysts at ING, however, remain skeptical of any significant change in China’s $760 billion holdings but caution that any surprise could spur further dollar and Treasury selling.
Later in the session, markets will also assess March retail sales data and comments from Federal Reserve Chair Jerome Powell. A dovish tone following Fed Governor Christopher Waller's unexpectedly soft stance on Tuesday could further drag the dollar down.
Euro Gains as ECB Eyes Rate Cut
The euro advanced on the back of renewed demand, with EUR/USD climbing 0.7% to 1.1364. The single currency rebounded following last week’s retreat from a three-year high of 1.1474.
Eurozone inflation figures, due later today, are projected to confirm a cooling trend down to 2.2% in March from 2.3% in February which could pave the way for a 25 basis-point rate cut by the European Central Bank on Thursday.
EUR/USD may have already put in a short-term low and could be heading back to test the 1.1500 level, ING analysts noted.
Pound Rallies Despite Cooling Inflation
Meanwhile, the British pound posted strong gains, with GBP/USD rising 0.5% to 1.3283, nearing a six-month high. The move came even as U.K. inflation eased more than expected in March.
Consumer prices increased by 2.6% annually last month, down from 2.8% in February and below consensus forecasts of 2.7%. The Bank of England is now expected to consider cutting interest rates at its May policy meeting, having held rates steady at 4.5% last month.
Despite the inflation miss, sterling remained buoyed by broad dollar weakness. GBP/USD is dominated by the soft dollar story and has last year’s highs of 1.3430 in its sights, ING added.
Asian Markets: Yen Strengthens, Yuan Slips
In Asia, safe-haven flows supported the Japanese yen, pushing USD/JPY down 0.5% to 142.49. Meanwhile, USD/CNY edged 0.1% higher to 7.3236 despite stronger-than-expected Chinese growth data.
China’s economy expanded by 5.4% in Q1 2025, beating forecasts of 5.2% growth. Industrial production surged 7.7% in March, while retail sales rose 5.9%, thanks in part to stimulus measures aimed at boosting domestic demand. However, ongoing U.S. tariff threats continue to weigh on the yuan's longer-term outlook.
The U.S. dollar is facing significant challenges, with Citigroup adjusting its forecast for the EUR/USD currency pair in response to the current volatility. The bank has raised its target for EUR/USD to a potentially unprecedented level, foreseeing a remarkable 19% increase in the four-month spot rate.
