The euro edged higher on Friday and is poised for a second consecutive week of gains on growing fears that any escalation in the trade conflict between the United States and China would force U.S. policymakers to cut interest rates.
U.S. President Donald Trump’s tariff increase to 25% from 10% on $200 billion (153 billion pounds) of Chinese goods kicked in on Friday, and Beijing said it would strike back. The two sides are pursuing last-ditch talks to try to salvage a trade deal.
While U.S. and Chinese officials return to the negotiating table later on Friday, investors have quietly ratcheted up bets of a U.S. interest rate cut with markets now roughly expecting one rate hike by the end of 2019.
Athanasios Vamvakidis, an FX strategist at Bank of America Merrill Lynch, said if China retaliated then the threat of a global trade war will affect the outlook of the U.S. economy and increase the chances of a Fed rate cut.
“In this case, the Fed has more room to ease than most other central banks, suggesting eventually a weaker dollar against both the euro and the yen,” he said.
The single currency edged 0.1% higher to $1.1220 on Friday and was on track for a second consecutive week of gains.
Broadly, risk appetite was muted though some of the higher-yielding currencies such as the Australian dollar which was heavily sold earlier this week when Trump unexpectedly ratcheted up trade tensions, gained.
The dollar index measuring the U.S. currency against a basket of six major currencies, of which the euro is a main component, was slightly firmer at 97.43.
Still, trade tensions have had broadly little impact on foreign exchange markets with typical perceived safe-haven assets such as the Japanese yen only gaining 1.2% this week while broader currency market volatility gauges were subdued despite a minor bounce this week.
Elsewhere, the pound held around the $1.30 level after sustaining some losses this week before first quarter British GDP data where expectations are for a 0.5% expansion compared with 0.3% growth in the previous quarter.