Dollar dented by economic worries; euro remains in favor

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The dollar hovered near a five-month low against the euro on Monday as worries about the economic fallout from U.S. President Donald Trump's protectionist trade policies kept investors cautious on the dollar.

The euro, which has advanced in recent sessions, lifted by hopes of a German fiscal deal, was 0.4% higher at $1.092325. The common currency was just shy of $1.0947 it hit last week, its highest since October 11.

Currency markets have undergone a shift in recent months as traders re-evaluate their initial expectations that Trump's economic policies would both support the dollar and cause other currencies to weaken. The reassessment has prompted the dollar to retreat 6% against the euro since mid-January.

"I think the market just called it wrong," said Kyle Chapman, FX markets analyst at Ballinger Group, in London.

"They were leading on the tax cuts and deregulation to boost growth, while at the same time creating a sort of risk-averse mood," he said.

"Actually the focus has been much more on the protectionism, sending people's heads spinning," Chapman said.

Since taking office in January, Trump's declarations on imposing and then suspending tariffs against a wide range of trading partners have unnerved markets.

While ruling out the possibility of a financial crisis, Treasury Secretary Scott Bessent, in an interview aired on Sunday, said there were "no guarantees" there will not be a recession in the United States.

The dollar found little support from a Commerce Department report on Monday that showed retail sales rebounded moderately in February, after a revised 1.2% decline in January.

The week is packed with central bank meetings, including the Federal Reserve, the Bank of Japan and the Bank of England, all of which are widely expected to hold fire as policymakers try to see through the current economic uncertainty.

The euro has strengthened after German parties on Friday agreed on a fiscal deal that could boost defence spending and revive growth in Europe's largest economy.

Analysts at Societe Generale said on Monday that they had changed their currency forecasts "to reflect Germany's planned fiscal changes, the U.S. economy's self-inflicted (relative) fragility, and Japan's escape from deflation."

They see the euro at $1.13 by year-end, up nearly 4% from current levels, and the yen at 139 per dollar, up about 7%.

On Monday, the dollar was 0.4% higher against the yen at 149.160 yen, not far from the five-month low of 146.52 yen touched last week.

The Bank of Japan is tipped to keep interest rates steady when it meets 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.

Meanwhile, the Chinese yuan edged back towards its strongest level in four months in offshore trading, changing hands at 7.2332 per dollar. Last Wednesday, it strengthened to 7.2158 per dollar for the first time since November 13.

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

During the session, a string of China data showed the economy started the year on a firmer footing with retail sales picking up speed in the first two months.

In cryptocurrencies, bitcoin, the world's largest cryptocurrency by market cap, was up 1.6% on the day at $84,552.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by By Kevin Buckland and Alun John, Editing by Angus MacSwan and Sandra Maler)