The US dollar rebounded against the euro on Friday after comments from President Donald Trump sparked risk aversion and market uncertainty.
Trump announced that trade negotiations with Canada were over and suggested he might consider bombing Iran again, sending shockwaves through global markets.
Political Tensions Disrupt Market Assumptions
“These messages highlight how erratic Trump is and that any assumptions built into markets can be instantly undermined,” said Adam Button, chief currency analyst at ForexLive.
Initially, traders sought refuge in the dollar, but Button warned the rally might fade.
“The trade war has been a dollar drag all year,” he added.
Canadian Dollar Weakens on Trade Breakdown
The Canadian dollar fell 0.5% to C$1.37 per US dollar following Trump’s response to Canada’s digital services tax on technology firms.
Meanwhile, US Treasury Secretary Scott Bessent said trade deals with various nations could be finalized by Labor Day, hinting at ongoing shifts in US trade policy.
Trump’s Iran Threat and Fed Rumors Undermine Dollar
Trump also escalated tensions with Iran, criticizing its Supreme Leader and indicating that sanctions would remain in place.
He suggested military action could return if Iran increased uranium enrichment.
Earlier on Friday, the dollar had fallen to a 3.5-year low against the euro as investors bet on more aggressive interest rate cuts by the Federal Reserve.
Weak Economic Data Fuels Rate Cut Bets
Friday’s economic reports revealed an unexpected drop in consumer spending for May, following a surge in purchases ahead of anticipated tariffs.
Inflation data showed only moderate monthly increases.
A weekly jobs report also painted a dim picture, with continuing unemployment claims hitting their highest level since November 2021.
Dovish Fed Outlook Adds to Pressure
Federal Reserve Chair Jerome Powell signaled that rate cuts were on the table if inflation didn’t rise during the summer, which markets interpreted as a dovish stance.
There are also reports that Trump may appoint a replacement for Powell before his term ends in May, potentially weakening the Fed chair’s influence.
A more dovish successor could reinforce expectations of further monetary easing.
Stocks Rally Despite Currency Volatility
Despite the dollar’s movement, equity markets closed on a high.
The S&P 500 and Nasdaq gained 0.5% each, while the Dow Jones Industrial Average climbed 1%.
Lou Brien, strategist at DRW Trading, noted, “Some of the data that we’ve had has not been particularly good over the last few days.”