Feb 27 (Reuters) - The dollar index was on pace for its biggest gain since the start of the year on Thursday after U.S. President Donald Trump said proposed tariffs on Mexican and Canadian goods would go into effect on March 4 and threatened an extra 10% duty on Chinese imports.
Dollar gains were partly fueled by portfolio rebalancing flows, a favorable shift in forwards over month-end, haven-related demand and hawkish language from Fed officials.
U.S. Treasury yields trimmed gains after data suggested the U.S. economy was cooling. Applications for unemployment benefits rose the most in five months last week, pending home sales slid 4.6% in January, the Kanas City Fed manufacturing index dropped to its lowest level since September. Next up, traders will focus on Friday's core PCE index data. Kansas City Federal Reserve President Jeff Schmid said inflation expectations mean the U.S. central bank needs to keep its focus on ensuring price pressures are fully contained and Federal Reserve Bank of Cleveland President Beth Hammack said she expects U.S. central bank interest rate policy is on hold for the time being to curb inflation pressures.
EUR/USD slid 0.7%, dropping below its 21-day moving average before finding buyers near the 1.04 support level.
About EUR2.3b of 1.04 strikes expire on Friday, the last in a batch of very large options rolling off this week. Bulls have been trimming positions threatened by the risks of soon-to-be announced EU tariffs and expectations of European Central Bank rate cut next week, with Thursday's pivot toward havens sending EUR/CHF to its lowest level since January 13.
Concerns about European growth suggest the euro will fall further though hopes for an accord on Ukraine may slow downward momentum. Following a meeting with British Prime Minister Keir Starmer, Trump said Ukraine peace and mineral discussions were proceeding, adding that reciprocal tariffs were coming.
GBP/USD fell 0.5% though pound losses were curtailed by EUR/GBP weakness. Cable positioning remains relatively modest, suggesting the pair will stay between its February 14 low of 1.2541 and 1.2717 Wednesday's flash high. Seasonals in the pair start to lean bearish into late-March. USD/JPY rose amid broad greenback gains though struggled to move much beyond 150 due to cross-related sales. AUD/JPY dipped to its lowest level since August as the offshore yuan came under pressure. A soft Tokyo CPI report on Friday has the potential to lift USD/JPY toward 150.93 Feb 7 low.
Prime Minister Justin Trudeau said Canada "will have an immediate and extremely strong response" if the United States imposes tariffs on Canadian imports next Tuesday.
Treasury yields rose 3 to 5 basis points. The 2s-10s curve was up about 2 basis points to +20.0bp.
The S&P 500 was little changed in mixed trading. Oil jumped 2.6% after Trump revoked Chevron's license to operate in Venezuela.
Gold fell 1.0% as the dollar advanced, while copper rose 0.8%.
Heading toward the close: EUR/USD -0.64%, USD/JPY +0.62%, GBP/USD -0.36%, AUD/USD -0.86%, =USD +0.66%, EUR/JPY -0.01%, GBP/JPY +0.31%, AUD/JPY -0.20%.(Editing by Burton Frierson Reporting by Robert Fullem)
