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CURRENCIES : Dollar Drops For Second Day As Tariffs Spark Fears Of Global Trade War

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03/02/2018 | 01:03pm CET

By Sara Sjolin, MarketWatch

Dollar at lowest vs. yen in more than a year; Theresa May to speak about Brexit

The dollar dropped for a second straight day on Friday, as fears of trade wars prompted investors to dump the greenback after President Donald Trump said the U.S. will impose tariffs on steel and aluminum imports.

The yen rallied after Bank of Japan Governor Haruhiko Kuroda said his central bank would start thinking about exiting its massive stimulus program in 2019.

What are currencies doing?

The ICE U.S. Dollar Index was down 0.4% at 89.94, building on a 0.3% loss from Thursday , which was its first decline in three sessions. For the week, the dollar gauge was tilting slightly negative.

The yen jumped, with the greenback falling to Yen105.41 from Yen106.24 on Thursday, putting the dollar around its lowest against Japan's currency since November 2016, according to FactSet data.

The pound bought $1.3801, rising from $1.3777 late Thursday in New York.

The euro rose to $1.2306 from $1.2268 on Thursday.

What is driving the markets?

The dollar weakness was a continuation of the downbeat mood that started Thursday after Trump said he will sign orders next week imposing a 25% tariff on steel imports and a 10% tariff on aluminum. "Trade wars are good, and easy to win," Trump said on Twitter early Friday (https://twitter.com/realDonaldTrump/status/969525362580484098).

Other countries may now retaliate by imposing their own trade tariffs, which could hurt U.S. exports and slow down economic growth, which would hurt the dollar.

On Friday, Canada, the European Union (http://europa.eu/rapid/press-release_STATEMENT-18-1484_en.htm), Mexico, China and Brazil had already said they were weighing up countermeasures (http://www.bbc.co.uk/news/world-us-canada-43251320), according to media reports. European Commission President Jean-Claude Juncker said he'll take the matter to the World Trade Organization.

In Japan, Kuroda said inflation is on track to reach the BOJ's 2% target in fiscal 2019, adding that it would be natural for policy makers to consider an exit from its aggressive easing program. Japan's 2019 fiscal year starts in April of next year. Tighter monetary policy usually boosts a country's currency and the yen on Friday rallied on the comments.

Meanwhile in Europe, a trio of political risks were on the agenda. Later Friday, U.K. Prime Minister Theresa May is due to lay out her much anticipated plan for trade with the EU after Brexit. After flat out rejecting the EU's draft divorce treaty earlier this week, analysts fear May will strike a harder line in the negotiations and drive a larger wedge between London and Brussels.

The pound had been rising in recent months on hopes for more Brexit clarify, but has slumped this week on fears the two sides will struggle to reach a trade deal.

Euro investors were focused on two major political events on this Sunday: The Italian general election and the result from Germany's center-left Social Democratic Party's vote on whether to join a grand coalition with Chancellor Angela Merkel's center-right Christian Democratic Union.

Analysts said any surprises from either event could spark a period of political uncertainty in the currency union and drive the euro lower.

What are strategists saying?

"Tariffs are bad for general trade and the economy. The U.S. is already running a huge trade deficit and protectionism is not the way to improve it as it generally deteriorates economic conditions," said Richard Perry, market analyst at Hantec Markets, in emailed comments.

"They may reduce imports but it will also reduce exports, meaning that economic growth is reduced and this would impact negatively on the dollar. It is a very myopic reaction to combating a trade deficit," he added.

In relation to the pound, Jasper Lawler, head of research at London Capital Group, said traders were watching for signs if a trade deal could be pushed further into the distance.

"Should hopes be dashed of a deal being reached GBP/USD could dive towards $1.36. Meanwhile, any signs of a close alignment to the EU could boost the pound back towards $1.39. GBP/USD could find itself well supported should the dollar continue to sell off in response to Trump's tariffs," he said in a note.

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