Dollar Rises on Tariff News, Euro and Yen Under Pressure

The dollar index (DXY00) increased by +0.35% on Friday, reaching a two-week high. This gain was fueled by positive momentum from Thursday’s announcement by President Trump. He stated that the proposed 25% tariffs on Canada and Mexico will start on March 4, with an additional 10% tariff on China taking effect the same day. The dollar peaked after a scheduled meeting between Trump and Ukrainian President Zelenskiy ended in disagreement and was canceled, adding to tensions regarding the ongoing Ukraine-Russian conflict.

However, bearish factors influenced the dollar as well. The US January personal spending report, which unexpectedly declined, was a notable indicator, alongside the January core PCE price index— the Federal Reserve’s preferred gauge of inflation— which met expectations. This was viewed as dovish for future Fed policy.

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The US January personal spending decreased by -0.2% month-over-month, missing expectations of a +0.2% increase and marking the largest decline in nearly four years. Conversely, personal income rose by +0.9% month-over-month, outperforming expectations of +0.4% and demonstrating the largest increase in one year.

For January, the core PCE index increased by +0.3% month-over-month and +2.6% year-over-year, aligning with expectations. The +2.6% annual increase represents the slowest growth rate seen in about four years.

Additionally, the February MNI Chicago PMI rose by +6.0, reaching a five-month high of 45.5, significantly surpassing forecasts of 40.8. Currently, markets assign a 7% probability of a -25 basis point rate cut at the next FOMC meeting on March 18-19.

In foreign exchange markets, EUR/USD (^EURUSD) fell by -0.31%, hitting a two-week low. The euro, which began the day with modest gains, reversed course following the contentious meeting between Trump and Zelenskiy, which hindered peace negotiations in Ukraine. Additional pressure on the euro came from a decline in ECB January inflation expectations and German retail sales figures that were lower than anticipated—both signals of dovish ECB policy. Furthermore, the drop in the 10-year German bund yield to a two-week low diminished the euro’s interest rate differential.

Despite the initial decline, the euro gained traction briefly after the German January CPI rose more than expected, presenting a hawkish factor for ECB policy. The ECB’s January 1-year CPI expectations unexpectedly eased to +2.6%, differing from projections of no change at +2.8%. The January 3-year CPI expectations remained steady at +2.4%, better than expectations that suggested an increase to +2.5%.

German retail sales saw a modest rise of +0.2% month-over-month, which fell short of expectations of +0.5%. In contrast, German February CPI (EU harmonized) increased by +0.6% month-over-month and +2.8% year-over-year, exceeding forecasts of +0.5% month-over-month and +2.7% year-over-year. Current swaps imply a near-certain 99% probability of a -25 basis point rate cut by the ECB in their meeting scheduled for March 6.

Looking at USD/JPY (^USDJPY), the currency pair rose by +0.50%. The yen hit a one-week low against the dollar after disappointing Japanese economic data. Specifically, February Tokyo CPI rose less than expected, while January industrial production decreased, and January retail sales also missed projections—these factors are perceived as dovish for Bank of Japan policy. However, safe-haven demand for the yen was bolstered as the Nikkei Stock Index dropped to a 5-1/4 month low, and a decline in Treasury note yields further supported the yen.

Japan’s January industrial production fell by -1.1% month-over-month, consistent with expectations. Meanwhile, January retail sales increased by +0.5% month-over-month, which was below the anticipated +0.6%. In February, Tokyo CPI rose +2.9% year-over-year, falling short of the expected +3.2%, as CPI ex-fresh food and energy increased by +1.9% year-over-year, below the +2.0% forecast.

In commodities, April gold (GCJ25) closed down -47.40 (-1.64%), and March silver (SIH25) finished down -0.582 (-1.83%). Precious metal prices suffered additional losses following Thursday’s downturn, with gold falling to a three-week low and silver to a one-month low. The strengthening dollar index contributed to the pressure on precious metals. Additionally, declining inflation expectations in the Eurozone diminished gold’s allure as an inflation hedge, given that the ECB’s January CPI expectations came in weaker than projected.

Nonetheless, precious metals received support from the narrowly aligned core PCE price report, which reassured expectations regarding continued rate cuts by the Federal Reserve. Safe-haven demand for these assets rose after President Trump confirmed tariffs on Canada and Mexico would take effect next week. Furthermore, the increase in long gold positions in ETFs contributed positively, as holdings reached a 13-3/4 month high.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the 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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