Dollar Index Hits Two-Week High Amid Trade Policy Changes
The dollar index (DXY00) is up +0.03% today, reaching a two-week high. This increase can be attributed to positive momentum from Thursday’s announcement by President Trump regarding the implementation of a 25% tariff on Canada and Mexico, effective March 4. Additionally, a 10% tariff on China will take effect on the same date. Despite this boost, the dollar lost much of its earlier gains following an unexpected decline in US personal spending for January and stability in the core PCE price index, which aligns with the Federal Reserve’s inflation expectations.
Personal Spending and Income Data
January personal spending experienced an unexpected fall of -0.2% month-over-month, contrary to projections of a +0.2% increase. This marks the largest decline in nearly four years. Conversely, personal income for January increased by +0.9% month-over-month, surpassing expectations of +0.4% and indicating the most significant growth observed in a year.
The Barchart Brief: Your FREE insider update on the biggest news stories and investing trends, delivered midday.
Core PCE Index and Manufacturing Survey Insights
The core PCE index for January increased by +0.3% month-over-month and +2.6% year-over-year, meeting expectations. This year-over-year figure represents the slowest annual growth rate observed in nearly four years. Additionally, the February MNI Chicago PMI rose +6.0 points to a five-month high of 45.5, outperforming expectations of 40.8.
Market analysts are currently pricing in a 5% likelihood of a -25 basis point rate cut at the upcoming FOMC meeting scheduled for March 18-19.
Eurozone Developments Affecting EUR/USD
The EUR/USD (^EURUSD) has gained +0.15% today as the euro rebounded from a two-week low. This improvement follows stronger-than-expected inflation data from Germany for January, serving as a hawkish signal for ECB policy. Earlier, the euro faced downward pressure due to declining inflation expectations from the ECB and disappointing retail sales figures from Germany.
Today’s drop in the 10-year German bund yield to a two-week low has also strained the euro’s interest rate differentials. Furthermore, Trump’s remarks about the impending tariffs on Canada and Mexico have continued to weigh on the euro.
CPI Expectations and Retail Performance
The ECB’s January one-year CPI expectations unexpectedly dipped to +2.6%, down from expectations of +2.8%. In contrast, the three-year CPI expectations remained unchanged at +2.4%, surpassing forecasts for an increase to +2.5%. Meanwhile, German retail sales for January rose by +0.2% month-over-month, falling short of the projected +0.5% increase. The February CPI (EU harmonized) in Germany increased by +0.6% month-over-month and +2.8% year-over-year, exceeding expectations of +0.5% and +2.7% respectively.
Market swaps indicate a 99% probability of a -25 basis point rate cut by the ECB at its March 6 policy meeting.
Japanese Economic Conditions Impacting USD/JPY
The USD/JPY (^USDJPY) has risen by +0.64% today, while the yen has fallen to a one-week low against the dollar largely due to negative economic data from Japan. The February Tokyo CPI increased less than anticipated, while January industrial production and retail sales both reported weaker results, contributing to dovish sentiments regarding BOJ policy. However, a notable decline in the Nikkei Stock Index to a five-and-a-quarter-month low has bolstered safe-haven demand for the yen, along with a decrease in Treasury note yields.
Japan’s Economic Indicators
For January, Japan’s industrial production fell by -1.1%, aligning with expectations. Meanwhile, retail sales rose by +0.5% month-over-month, which is lower than forecasts of a +0.6% increase. Additionally, the February Tokyo CPI increased by +2.9% year-over-year, below expectations of +3.2%, and the core CPI (excluding fresh food and energy) rose by +1.9% year-over-year, also trailing the anticipated +2.0%.
Precious Metals Struggle Amid Market Shifts
April gold (GCJ25) is down -45.90 (-1.58%), and March silver (SIH25) declined -0.671 (-2.11%). Prices for precious metals continue to suffer after adding to losses from Thursday, with gold dropping to a three-week low and silver to a one-month low. The dollar index’s rise to a two-week high has created bearish pressure on precious metals. Declining inflation expectations in the Eurozone, evidenced by the ECB’s weaker January CPI forecasts, limit gold’s attractiveness as an inflation hedge.
Despite these challenges, precious metals are supported by the aligned US January core PCE price report, which strengthens expectations for the Fed to continue reducing interest rates. Demand for safe-haven precious metals has increased following Trump’s tariffs announcement, and fund inflows into gold have pushed long positions in ETFs to a 13-and-three-quarter-month high as of Thursday.
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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
