Dollar Falls to Four-Month Low Amid Economic Pressures

The dollar index (DXY00) experienced a decline of -0.21% on Thursday, reaching a four-month low. The pressure on the dollar stems from the negative impact of U.S. tariffs on the domestic economy. Additionally, the euro’s strength affected the dollar as the EUR/USD surged to a four-month high following the ECB’s announcement that interest rates are less restrictive. Meanwhile, the yen appreciated to a five-month high against the dollar due to Japan’s largest labor union calling for higher wages. The dollar’s losses deepened further after the U.S. January trade deficit expanded to a record level.

Despite this downturn, hawkish remarks from Philadelphia Fed President Harker helped limit some of the dollar’s losses. He cautioned that rising price pressures might jeopardize progress on inflation. Furthermore, the drop in stock values on Thursday led to an increased demand for liquidity in dollars.

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In reports of labor market strength, U.S. weekly initial unemployment claims fell by -21,000 to 221,000, better than expectations of 233,000. Additionally, U.S. Q4 nonfarm productivity was revised upwards to 1.5% from the previously reported 1.2%. Conversely, Q4 unit labor costs were lowered to 2.2% from 3.0%.

The trade deficit for January widened to a record -$131.4 billion, surpassing expectations of -$128.8 billion. Harker also expressed concern regarding the slow pace of declining price growth, stating, “a lot of pressures are building” that could hinder reaching the Fed’s 2% target. He cautioned that “business and consumer confidence is starting to wane, and that’s not a good sign.”

Market focus will shift to Friday’s February nonfarm payroll report, which is expected to show a rise of +160,000 jobs, while the unemployment rate is projected to remain unchanged at 4.0%. Furthermore, average hourly earnings are anticipated to hold steady from January’s rate of +4.1% year-over-year. On the same day, Fed Chair Powell will deliver a keynote address on the economic outlook at the Chicago Booth’s 2025 U.S. Monetary Policy Forum.

Currently, markets are pricing in a 14% likelihood of a -25 basis point rate cut at the upcoming FOMC meeting on March 18-19.

The EUR/USD (^EURUSD) rose by +0.08% on Thursday, achieving a four-month high. This increase is attributed to soaring Eurozone government bond yields, which are enhancing the euro’s interest rate differentials as the 10-year German bund yield climbed to a 16-month high. The euro continued to gain ground after the ECB’s anticipated interest rate cut, indicating that rates are becoming “meaningfully less restrictive,” fueling speculation about the end of the ECB’s rate-cutting period.

Despite this, Eurozone January retail sales unexpectedly dropped by -0.3% month-over-month, falling short of a +0.1% expectation. The ECB cut the deposit facility rate by 25 basis points to 2.50% from 2.75% and revised its 2025 GDP forecast for the Eurozone down to 0.9% from 1.1%. The forecast for 2025 inflation, excluding food and energy, was lowered to 2.2% from 2.3%.

Swaps indicate a 77% probability of a -25 basis point rate cut by the ECB at its policy meeting set for April 17.

USD/JPY (^USDJPY) fell by -0.74% on Thursday. The yen’s ascent to a five-month high against the dollar followed a significant wage increase demand from Japan’s largest labor union, the biggest since 1993, which may influence the Bank of Japan’s interest rate decisions. Soaring yields on Japanese government bonds bolstered the yen’s appeal as the 10-year JGB bond yield hit a 15-year high of 1.553%. However, the yen pulled back from its peak as Treasury note yields increased, a bearish signal for the currency.

Japan’s leading union group is pushing for a 6.09% wage increase this year, a highly significant shift for BOJ policy.

In commodity markets, April gold (GCJ25) closed up +0.60 (+0.02%), while May silver (SIK25) finished +0.204 (+0.62%). Precious metals saw modest recoveries from earlier losses, with silver attaining a 1.5-week high. The dollar’s decline to a four-month low is a bullish factor for these metals, supported by increased safe-haven demand as stock markets fell. Furthermore, the ECB’s latest actions and heightened geopolitical tensions from tariffs against Canada, China, and Mexico are contributing to the appeal of precious metals as stores of value. Fund buying has propped up gold prices, with long positions in ETFs reaching a 15-month high as of Wednesday.

Initially, precious metals dropped due to surging global bond yields following the rise in German and Japanese government bond yields. Additionally, hawkish comments after Thursday’s ECB meeting, which stated that interest rates are becoming less restrictive, added downward pressure. Silver, in particular, is feeling the impact of concerns that U.S. tariff actions may incite a global trade war, hampering economic growth and demand for industrial metals.

On the date of publication, Rich Asplund did not hold positions in any securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information, please view the Barchart Disclosure Policy
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