Dollar Weakens Amid Trade Tensions; Precious Metals Rally
The dollar index (DXY00) decreased by -0.09% on Wednesday, facing pressure as the US-China trade tensions escalate. China implemented 84% tariffs on US goods in retaliation for the US’s prior imposition of 104% tariffs on Chinese products. Additionally, the dollar faces a confidence crisis as the US reevaluates its trade relationships, impacting its reserve-currency status and prompting some foreign investors to sell dollar-denominated assets.
Despite these pressures, the dollar rebounded from its lowest point following President Trump’s announcement of a 90-day pause on reciprocal tariffs affecting 56 countries. However, tariffs on China were increased from 104% to 125% in response to their action. Moreover, hawkish remarks from Minneapolis Fed President Neel Kashkari provided some support for the dollar as he stated there is a higher threshold for Fed rate cuts due to the inflationary impact of tariffs.
Comments from St. Louis Fed President James Bullard, however, added a negative outlook for the dollar. He expressed concerns that US economic growth could “materially” decline below trend and unemployment rates may rise as companies and households contend with price increases caused by new import tariffs. Kashkari reiterated that the likelihood of altering the federal funds rate has heightened amid tariff-induced inflation, suggesting the Federal Reserve may hesitate to lower rates even if economic conditions worsen.
Minutes from the March 18-19 FOMC meeting indicated concerns regarding stagflation, which contributed to bearish sentiment for the dollar. Most Fed officials acknowledged that risks to inflation appear to skew upwards while risks to employment are tilting downwards. They further expressed that uncertainty could suppress consumption, warranting a cautious policy approach.
The markets are currently assigning only a 20% probability to a -25 basis-point rate cut following the FOMC meeting on May 6-7, a decrease from the previous week’s 30% probability.
Euro Gains Ground Against Dollar
The EUR/USD (^EURUSD) rose by +0.02% on Wednesday, buoyed by a weakening dollar as the US-China trade conflict intensified. The euro also received a boost from hawkish comments by ECB Governing Council member Robert Holzmann, who stated, “I don’t see reason for the ECB to cut interest rates now.” However, dovish statements from other ECB officials, including Villeroy de Galhau and Olli Rehn, suggesting a potential interest rate cut at the upcoming policy meeting, capped the euro’s gains.
Holzmann indicated that the ECB should wait for global trade uncertainties exacerbated by US tariffs to settle before making any further interest rate cuts. Villeroy de Galhau commented that a rate decrease should occur “soon” given the effects of US tariffs on global markets. Meanwhile, Rehn asserted that the rationale for continuing interest rate reductions had strengthened significantly based on a comprehensive assessment of inflation and economic growth.
Swaps are indicating a 100% chance of a -25 basis-point interest rate cut by the ECB at the April 17 policy meeting.
Yen Experiences Modest Losses
The USD/JPY (^USDJPY) rose by +1.04% on Wednesday, as the yen retreated from a six-and-a-half month high against the dollar. This decline can be attributed to higher Treasury note yields, which diminished the yen’s appeal. The dollar’s recovery from substantial losses triggered long liquidation in the yen after Trump announced a temporary pause on reciprocal tariffs.
Initially, the escalation of the US-China trade war had driven safe-haven demand for the yen when China retaliated with 84% tariffs on US products; however, subsequent developments dulled that effect. The Japan consumer confidence index for March fell to a two-year low of 34.1, below the anticipated 34.8. BOJ Governor Kazuo Ueda stated that the Bank of Japan intends to maintain current interest rates, highlighting the importance of evaluating ongoing uncertainties linked to tariffs while observing economic and inflationary trends.
Precious Metals Surge Amid Market Turmoil
In commodities, June gold (GCM25) closed up +89.20 (+2.98%), while May silver (SIK25) increased by +0.729 (+2.46%). Precious metals prices surged on Wednesday in response to the intensifying US-China trade conflict. China’s imposition of 84% tariffs fueled heightened demand for the safety of these assets. Additionally, dovish comments from ECB officials regarding potential rate cuts further encouraged investors to seek precious metals as a secure store of value. Geopolitical tensions in the Middle East, particularly the ongoing Israeli airstrikes in Gaza and US operations against Houthi rebels in Yemen, have also contributed to increased safe-haven demand.
Despite the strong performance of precious metals, rising Treasury yields weighed on prices. Additionally, hawkish statements from central bank officials—including Holzmann and Kashkari, regarding interest rates, tempered the positive momentum for these commodities. Concerns that the trade conflict could negatively impact global growth and demand for industrial metals have also restrained silver price gains; gold prices retracted from their highs following Trump’s tariff pause announcement.
On the date of publication, Rich Asplund did not hold any positions in the securities mentioned in this article. All information and data in this article is provided for informational purposes only. For full disclosure, please see the Barchart Disclosure Policy here.
More news from Barchart
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
