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Trump's erratic tariff campaign keeps policymakers,

investors

cautious

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Euro set for first weekly drop this month

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New round of reciprocal tariffs expected April 2

(Updates with midday European trading)

By Kevin Buckland and Yadarisa Shabong

TOKYO, March 21 (Reuters) - The dollar steadied on

Friday against other major currencies, including the euro which

was set for its first weekly drop this month, as a busy week for

central banks wrapped up and caution remained about the impact

of a global trade war.

The U.S. dollar index, measuring the greenback

against a basket of six currencies, edged higher to 103.88,

after strengthening 0.36% on Thursday - its best single-day

performance for three weeks - after the Federal Reserve

indicated it was in no rush to cut interest rates.

The euro, which has by far the heaviest weighting

in the dollar index, eased 0.09% to $1.0844 after dropping 0.45%

on Thursday. It is set to end the week 0.37% lower after a

strong two-week run boosted by Germany's massive spending plans.

On Friday, Germany's Bundesrat, the upper house of

parliament, passed a reform of the country's borrowing rules and

a 500-billion-euro fund to revamp its infrastructure and revive

Europe's largest economy.

The euro had rallied in the past two weeks on German

Chancellor-in-waiting Friedrich Merz's spending plans although

questions about how much and when it will be spent remained.

Kenneth Broux, head of corporate research FX and rates at

Societe Generale, said the euro's move on Friday was mostly due

to profit-taking.

'RECALIBRATION'

"Overall we've seen a pause in the recalibration away from

dollar assets, and that's also been evident in FX, where we've

seen the euro starting to retrace some of the gains since the

end of January," said Broux.

The week saw major central banks, including the Fed, the

Bank of England and Bank of Japan, leave interest rates

unchanged as they assessed the economic impact of U.S. President

Donald Trump's trade tariffs against global trading partners.

Fed policymakers signalled two quarter-point cuts for later

this year, the same median forecast as three months ago.

"We're not going to be in any hurry to move," Fed Chair

Jerome Powell said, underscoring the challenge policymakers face

in navigating Trump's tariffs policy, and the potential impact

on the domestic economy.

A new round of reciprocal levies is expected on April 2.

"As we head into the April 2...announcement, there is an

increased risk that market players trim back on USD shorts and

look to run a more neutral position," said Chris Weston, head of

research at Pepperstone.

The dollar index plumbed a five-month low of 103.19 this

week following a steady decline from its highest since late

2022, at 110.17 on January 13, as hopes for expansive policies

under Trump gave way to anxiety about a potential U.S. recession

caused by a global trade war.

"Euro/dollar has now pretty much converged with bond

spreads, especially in the two-year part of the curve," Broux

said, adding that it was closer to fair value at around $1.08

per euro.

There could be a "bit more" potential profit-taking in the

euro heading into the close on Friday, Broux added, as "there's

a bit more work to do" with regards to the U.S. and German

10-year bond yield spread.

The spread between U.S. and German 10-year yields

stood at 146 basis points, after widening to 176

bps two weeks ago. A wider spread theoretically supports the

euro, while a narrower one favours the dollar.

Elsewhere, the dollar edged up 0.09% to 148.9 yen.

On Wednesday, the Bank of Japan refrained from raising rates

again, and warned of heightening economic uncertainty in the

wake of ramped-up U.S. tariffs on trading partners.

Sterling fell 0.19% to $1.2944. The Bank of England

on Thursday warned that investors should not assume further cuts

were guaranteed, given the uncertainty hanging over the global

and UK economies.