Dollar Index Declines as Stocks Rally and Inflation Expectations Rise

The dollar index (DXY00) fell by -0.11% on Friday, driven by diminished safe-haven demand as stocks experienced a sharp rebound. This rally was fueled by an optimistic outlook for the passage of a spending bill aimed at preventing a U.S. government shutdown. Additionally, the dollar faced pressure from a decrease in U.S. consumer sentiment, which dipped to a 2-1/3 year low, signaling potential dovish implications for Federal Reserve policy. Furthermore, the dollar was weighed down by the euro’s strength, following reports of an agreement among Germany’s political parties on a debt package. However, the dollar found some support as U.S. inflation expectations for the 5-10 year period rose to their highest level in 32 years, a factor that leans hawkish for Fed policy.

The University of Michigan’s consumer sentiment index for March fell by -6.8 points, reaching a low of 57.9, which was notably weaker than the anticipated figure of 63.0.

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Additionally, the University of Michigan’s 1-year inflation expectations unexpectedly climbed to a 2-1/3 year high of +4.9%, surpassing the forecast that predicted no change at +4.3%. Similarly, the 5-10 year inflation expectations indicator rose to a 32-year peak of +3.9%, exceeding expectations of a decline to +3.4%.

Currently, the markets are pricing in only a 1% chance of a -25 basis point rate cut at the next Federal Open Market Committee meeting scheduled for March 18-19.

Euro Strength Supported by German Fiscal Deal

The EUR/USD (^EURUSD) exchange rate increased by +0.26%. This rise was underpinned by a report from Handelsblatt, indicating that the incoming German chancellor, Merz, had reached an agreement with the Green Party on a fiscal reform package aimed at large investments in infrastructure and defense. This development boosted German bund yields and enhanced the euro’s interest rate differentials. The euro also drew strength from hawkish comments made by ECB Governing Council member Holzmann, who mentioned his support for pausing ECB rate cuts in the coming month. Nevertheless, a downward revision to the German February Consumer Price Index (CPI) weighed slightly on the euro.

The revised German February CPI (for the EU harmonized measure) was adjusted downwards to +0.5% month-over-month and +2.6% year-over-year, compared to previous figures of +0.6% and +2.8%, respectively.

Holzmann further suggested that interest rates in the Eurozone are already at neutral levels and that renewed inflation poses a significant risk, implying that increasing European spending could compel the ECB to raise interest rates. Currently, swaps indicate a 47% likelihood of a -25 basis point rate reduction by the ECB during its policy meeting on April 17.

Japanese Yen Remains Under Pressure

On Friday, the USD/JPY (^USDJPY) rose by +0.49%, with the yen facing pressures from higher U.S. Treasury yields. The strength in global equity markets further diminished safe-haven demand for the yen. However, losses in the yen were limited by news of Japan’s largest labor union, Rengo, achieving its largest wage increase in over three decades—5.46% for the upcoming fiscal year—signaling sustained wage growth that may prompt the Bank of Japan (BOJ) to continue raising interest rates.

Precious Metals Supported by Trade War Tensions

April gold (GCJ25) closed up +9.80 (+0.33%) while May silver (SIK25) rose by +0.127 (+0.37%). Gold reached a contract high, marking a record for the March nearest-futures contract at $3,004.80 per ounce, and silver hit a 4-1/2 month high. The precious metals sector benefitted from a weaker dollar and persistent safe-haven demand linked to escalating trade tensions.

This week, the U.S. imposed a 25% tariff on goods from Canada and Mexico, while increasing the tariff on Chinese imports from 10% to 20%. In response, China, Canada, and the European Union enacted retaliatory tariffs on U.S. goods. Nonetheless, precious metals retreated from their peak levels after the March inflation expectations from the University of Michigan unexpectedly rose, casting a hawkish shadow over Fed policy. Higher global bond yields additionally proved bearish for precious metals, while Friday’s stock market rally and increasing tariffs raised concerns about potential impacts on economic growth and industrial metal demand.

On the date of publication, Rich Asplund did not hold positions in any of the mentioned securities. All information and data in this article are for informational purposes only. Please refer to the Barchart Disclosure Policy for more details.
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