Euro drops to three-week low before auto tariff announcement

By Karen Brettell

NEW YORK (Reuters) -The dollar hit a three-week high against the euro and gained on the yen on Wednesday as traders awaited an announcement from U.S. President Donald Trump on auto tariffs.

Traders worry that the trade levies will dent U.S. growth and potentially reignite inflation but are also mulling whether the tariffs will be less onerous than feared.

The press conference on auto tariffs is expected at 4 p.m. EDT on Wednesday.

"Everybody's trying to figure out what's going to be done on tariffs," said Steve Englander, head of global G10 FX Research and North America macro strategy at Standard Chartered Bank's New York Branch.

"They want to avoid market pressure before there's an announcement. But I think there's also some risk that, when push comes to shove, the announced tariffs will be more hawkish than the market's pricing," he added.

Trump said on Monday that tariffs on imported cars could come this week, ahead of plans to unveil next week a swath of reciprocal tariffs aimed at countries responsible for the bulk of the U.S. trade deficit.

Trump and his economics advisers have promised to announce those levies, and possibly some additional sectoral tariffs, on April 2.

The euro weakened sharply ahead of the tariff announcement, dropping to $1.075, its lowest since March 5. It was last down 0.32% at $1.0757, on track for its sixth consecutive day of declines against the greenback.

The European Union's trade commissioner Maros Sefcovic met with Trump's top trade officials on Tuesday to try to avoid steep U.S. tariffs on EU goods next week, but the outcome was unclear.

Bank of America said its proprietary flow data showed an acceleration of selling from the official sector — which includes sovereign wealth funds and central banks — of euros against the dollar beginning last week.

"Such flows suggest the official sector has yet to believe in the fading of the 'U.S. exceptionalism' and the 'European renaissance' that could trigger a potentially substantial rebalancing towards EU assets," said Athanasios Vamvakidis, head of forex strategy at BofA.

Meanwhile, Ukraine and Russia accused one another on Wednesday of flouting a truce on energy strikes brokered by the United States, and the European Union said it would not meet conditions set by Russia for a planned ceasefire in the Black Sea.

The greenback got a modest bid earlier on Wednesday after durable goods orders unexpectedly rose in February.

Minneapolis Federal Reserve Bank President Neel Kashkari said on Wednesday he is uncertain about the effect of tariffs on the U.S. economy, noting that they could push up prices arguing for higher interest rates, or slow economic growth and require reducing borrowing costs.

St. Louis Fed President Alberto Musalem said risks have increased that U.S. inflation will stall above the Fed's 2% target or even rise further in the near term, with rising import taxes potentially triggering more persistent price pressures.

The Japanese yen weakened 0.42% to 150.5 per dollar.

Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank must raise interest rates if persistent increases in food costs lead to broad-based inflation but cautioned that underlying inflation remains below its 2% annual target.

"The bar is high for the bank to dial up the pace of rate hikes. As such, the BOJ is unlikely to tighten policy by more than is currently priced in," Win Thin, global head of markets strategy at Brown Brothers Harriman, said in a report.

The BOJ is seen as most likely to next hike rates in July.

New Bank of Japan board member Junko Koeda also said the country's real interest rates are currently "extremely low," as inflation accelerates backed by solid growth in wages.

Japan's economic fundamentals suggest the yen's real value is closer to 120-130 per dollar rather than the current 150 levels, a senior lawmaker told Reuters, as the ruling party considers steps to help reverse capital outflows.

The British pound fell to a two-week low on cooler inflation and after British finance minister Rachel Reeves delivered her latest fiscal statement.

Gilt yields also fell after the UK's Debt Management Office said it would issue fewer bonds than expected in 2025/26, cooling market fears about another wave of supply. The British pound was last down 0.46% at $1.2884.

Data earlier showed British inflation slowed to an annual rate of 2.8% in February from 3.0% in January.

The Australian dollar was last down 0.14% at $0.6292. Data earlier showed that Australia's consumer inflation slowed in February.

In cryptocurrencies, bitcoin fell 1.53% to $86,548.

(Reporting by Karen Brettell;Additional reporting by Stefano Rebaudo; Editing by Jamie Freed, Bernadette Baum, Hugh Lawson and Sharon Singleton and Richard Chang)