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CURRENCIES | February 19, 2025

Rates Have More Impact that Tariff Threats

The buzz is all about US tariff threats but the what’s really impacting currencies is the moves by Central Banks to cut or maintain interest rates.

Granted, tariffs are having an impact, especially on emerging market currencies.

However bigger picture is that rate cuts tend to drive investors towards alternative currencies with higher rates.

That’s been a big factor in supporting a strong US dollar. It’s the Fed’s reluctance to cut rates. This has been the case since 2024 – before tariffs were on the table.

The Euro is feeling downward pressure from expectations that the European Central Bank will cut rates by 25 basis points at each of the next three meetings, bringing it down from the current 2.75%. Forecasts increasingly suggest rates could fall below 2% by 2026.
Wage growth and an unexpected leveling off of unemployment rates has supported the British pound and led to speculation that the Bank of England would pause rate cuts.
The Japanese yen weakened as investors reacted to weaker-than-expected economic data. Despite this, the yen continues to find support from expectations that the Bank of Japan will raise interest rates further this year, but not likely in March.
The offshore yuan depreciated past 7.28 per dollar, marking its third consecutive session of losses, following the announcement of new tariff plans from US President Donald Trump.