FOREX-Dollar recoups some losses as Trump speaks to Congress, euro supported

By Rae Wee

SINGAPORE, March 5 (Reuters) - The dollar regained some lost ground on Wednesday but was still languishing near a three-month low as U.S. President Donald Trump again vowed reciprocal tariffs in his first speech to Congress since taking office.

Moves in currencies were volatile as investors continued to reel from a trade war triggered by Trump following his new 25% tariffs on imports from Mexico and Canada that took effect on Tuesday, along with a doubling of duties on Chinese goods to 20%.

Canada and China quickly acted in kind the same day, while Mexican President Claudia Sheinbaum vowed retaliation but without details, saying she would announce Mexico's response on Sunday.

Still, the greenback found its footing on Wednesday as Trump repeated his threat of reciprocal tariffs on other countries on April 2 in a speech to Congress, giving some safe-haven support to the currency.

"The dollar regained some losses after Trump touched on retaliatory tariffs, owing to uncertainty weighing on sentiment and worries over a pick up in U.S. inflation," said Christopher Wong, a currency strategist at OCBC.

Uncertainty over Trump's tariffs threats and an escalation of global trade tensions have jolted markets as investors try to assess their implications on the global economy.

The firmer dollar knocked the euro EUR=EBS off a more than three-month top of $1.0637 hit earlier in the session, though the common currency didn't stray too far from its high and last traded 0.1% lower.

The euro had surged 1.3% on Tuesday on news that the parties hoping to form Germany's next government agreed to create a 500 billion euro ($530.95 billion) infrastructure fund and to overhaul borrowing rules in a tectonic spending shift to revamp the military and revive growth.

"If we get an unexpectedly large lift in the debt brake, I think it can probably push the euro up further, and of course, any further announcements on increased defence spending will also bolster expectations for European growth and therefore support the euro," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Elsewhere, sterling GBP=D3 eased 0.06% to $1.2788, while the yen JPY=EBS dipped slightly to 149.88 per dollar.

Canada's loonie CAD= lost 0.2% to stand at C$1.4424, while the Mexican peso MXN= recovered some of its losses and last stood at 20.60 per dollar.

Against a basket of currencies, the greenback =USD edged up slightly to 105.62, though was not far from Tuesday's low of 105.49.

The dollar index lost 0.9% in the previous session as investors fretted about the impact of a trade war on the U.S. economy, which is already showing signs of weakness.

"Rising inflation expectations and tariff angst are threatening the path of the U.S. economy towards a soft landing," said Boris Kovacevic, global macro strategist at Convera.

"This 'macro over tariffs' narrative underscores the transition from U.S. exceptionalism to rising stagflation risks. Sure, tariff hikes are theoretically positive for the dollar. However, investors are looking beyond the short-term safe haven flows and are worried about a prolonged growth slowdown."

BEIJING'S SUPPORT

In Asia, China unlocked more fiscal stimulus on Wednesday, signalling greater efforts to boost consumption to guard economic growth amid the escalating trade war with the United States. Policymakers as expected set this year's growth goal at roughly 5%.

That kept the yuan steady against the greenback, with the onshore unit CNY=CFXS rising 0.1% to 7.2610 per dollar.

The offshore yuan CNH=D3 eased 0.1% to 7.2618, though trimmed some losses from earlier in the session.

"Premier Li's pledge at the opening of the NPC, to provide additional stimulus to catalyse domestic consumption, should be well received by markets," said Brian Arcese, a portfolio manager at Foord Asset Management.

"We, however, must await additional detail on what exactly these consumer stimulative measures include to more fully understand their potential impact."

Traders and analysts said the growth target against a backdrop of Sino-U.S. tensions and weak sentiment meant monetary settings, particularly banks' reserve ratio (RRR), will be reduced. That could pressure the yuan further, given its relatively low yields.

The Aussie AUD=D3 traded 0.3% lower at $0.6254, as risk aversion in markets overshadowed upbeat domestic data that showed Australia's economy expanded at the fastest pace in two years in the December quarter.

The New Zealand dollar NZD=D3 similarly fell 0.26% to $0.5651, further pressured by news of Adrian Orr's sudden resignation as head of the Reserve Bank of New Zealand, three years before his current term ends. His role will finish on March 31.

($1 = 0.9417 euros)