Dollar on back foot as economic worries sap confidence; yuan firms

The U.S. dollar hovered close to a five-month low against its major peers on Monday, pressured by President Donald Trump's erratic trade policies and a run of soft macroeconomic data.

The euro stood not far from a five-month peak after German parties on Friday agreed on a fiscal deal that could boost defence spending and revive growth in Europe's largest economy.

There have been "two stark shifts in macro markets" over the past month, according to Goldman Sachs analysts Dominic Wilson and Kamakshya Trivedi.

The first is a "sharp re-rating lower" of U.S. assets "on the back of tariff volatility and the environment of broader policy uncertainty created by the new administration", while the second is a "sharp re-rating higher in the fiscal impulse in Germany", the analysts wrote in a note to clients.

"Together, these two shifts pose a significant challenge to the narrative of U.S. exceptionalism that has been a dominant market theme," they said.

The euro was fetching $1.0881, slightly off the $1.0947 level it hit last Tuesday for the first time since October 11.

German Chancellor-in-waiting Friedrich Merz announced on Friday that he had secured the crucial backing of the Greens for a massive increase in state borrowing.

The deal will likely be approved by the outgoing parliament next week. It includes a 500 billion euro ($544 billion) fund for infrastructure and sweeping changes to borrowing rules.

Elsewhere, the Japanese yen stuck close to a five-month top, buoyed by hawkish signals from the Bank of Japan, although the central bank is widely expected to retain the status quo in a policy decision on Wednesday. The U.S. Federal Reserve is also expected to leave policy unchanged on Wednesday.

The Chinese yuan edged back towards the strongest level in four months in offshore trading, ahead of a highly anticipated press conference on steps to boost domestic consumption, scheduled for 0700 GMT on Monday.

The dollar index, which measures the currency against the euro, yen and four other counterparts, was little changed at 103.71 early in the Asian morning, less than 0.5% away from a five-month trough of 103.21 reached last Tuesday.

The index is currently down almost 6% from the more than two-year peak of 110.17 touched in mid-January, as optimism that Trump's presidency would spur growth turned into worries that his trade policies could trigger recession.

Data on Friday showed U.S. consumer sentiment plunged to a nearly 2-1/2-year low in March and inflation expectations soared amid worries about the effect of Trump's sweeping tariffs, which have ignited a global trade war.

The dollar was little changed at 148.70 yen, not straying far from last Tuesday's trough at 146.545, the weakest level since October 4.

The BOJ looks almost certain to keep interest rates steady on Wednesday, but the conditions for another rate hike have been falling into place, with big Japanese firms offering bumper pay hikes in wage talks with unions for a third straight year.

Speaking in parliament last week, BOJ Governor Kazuo Ueda said he expects wage rises to spur a pick-up in consumption, although he was "very worried" about uncertainties surrounding overseas economic developments.

The dollar weakened 0.15% to 7.2266 yuan in the offshore market, edging back towards Wednesday's low of 7.2158, the weakest level since November 13.

On Sunday, China's State Council unveiled a "special action plan" to boost domestic consumption, featuring measures including increasing residents' income and establishing a childcare subsidy scheme.

The Australian dollar, which often acts as a more liquid proxy of the yuan, added 0.06% to $0.6328.

Sterling slipped 0.08% to $1.2927.

Bitcoin declined 0.5% to around $82,847.

($1 = 0.9191 euros)