Dollar Hits Six-Month Low Amid Trade War Fears

The dollar index (DXY00) is sharply down by -2.19%, reaching a six-month low today. This decline stems from concerns surrounding President Trump’s significant new reciprocal tariffs, which may trigger a trade war that could harm the economy and lead the Federal Reserve to consider cutting interest rates. Furthermore, today’s drop in the 10-year Treasury note yield to a 5-1/2 month low has diminished the dollar’s interest rate differentials. If investors decide to abandon U.S. assets due to the tariffs, the dollar could face a crisis of confidence. The dollar’s losses continued after the U.S. March ISM services index slipped more than anticipated, hitting a nine-month low.

In employment news, U.S. weekly initial unemployment claims unexpectedly decreased by -6,000, landing at a seven-week low of 219,000. This figure indicates a stronger labor market than the forecasted increase to 225,000. However, continuing claims rose by +56,000 to a 3-1/3 year high of 1.903 million, exceeding expectations of 1.870 million. This rise suggests it has become more challenging for unemployed individuals to return to work.

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The U.S. February trade deficit narrowed to -$122.7 billion from -$130.7 billion in January, better than the anticipated -$123.5 billion.

Additionally, the U.S. March ISM services index decreased by -2.7 points, reaching a nine-month low of 50.8, which was weaker than the projected 52.9.

Market attention is focused on the implications of President Trump’s new tariffs this week. On Friday, March nonfarm payrolls are expected to rise by +138,000, while the March unemployment rate is predicted to remain steady at 4.1%. Furthermore, March average hourly earnings are projected to increase by +0.3% month-over-month and +4.0% year-over-year, consistent with February’s figures. On the same day, Fed Chair Powell is slated to address the Society for Advancing Business Editing and Writing Conference regarding the economic outlook.

The markets currently assign a 34% chance for a -25 basis point rate cut in the aftermath of the May 6-7 FOMC meeting.

In the currency markets, EUR/USD (^EURUSD) has risen significantly by +2.26%, achieving a six-month high. The dollar’s decline today is benefitting the euro, which also received support from positive economic data. The Eurozone March S&P composite PMI was revised upward to a seven-month high of 50.9, from the previously reported 50.4. Additionally, Eurozone February producer prices rose by +3.0% year-over-year, aligning with forecasts and marking the fastest growth in nearly two years.

The minutes from the ECB’s March 6 meeting indicated that policymakers are considering both a rate cut and a potential pause for the upcoming April meeting, dependent on incoming data. Market swaps currently suggest a 72% probability for a -25 basis point rate cut at the April 17 policy meeting.

Meanwhile, USD/JPY (^USDJPY) is down sharply by -2.38%. The yen has surged to a six-month high against the dollar as Trump’s new reciprocal tariffs have resulted in widespread declines in global equity markets, heightening safe-haven demand for the yen. The upward revision to the Japan March Jibun Bank services PMI also provides support for the yen. The March Jibun Bank services PMI was revised upward by +0.5 to 50.0 from the previous reading of 49.5.

In commodity markets, June gold (GCM25) is down -28.10 (-0.89%), while May silver (SIK25) has dropped -2.175 (-6.28%). Precious metals are seeing significant drops, with gold reaching a one-week low and silver hitting a one-month low. Investor concerns surrounding Trump’s new tariffs have prompted many to liquidate profitable long positions in gold and silver to generate cash for losses in other markets. Additionally, falling inflation expectations have exerted downward pressure on gold prices, as they reduce demand for gold as an inflation hedge, following a decline in the U.S. 10-year breakeven inflation rate to a three-week low. Silver is also under pressure due to fears that U.S. tariffs may ignite a global trade war, negatively affecting demand for industrial metals.

Despite the dollar’s drop to a six-month low being potentially bullish for precious metals, ongoing trade war concerns continue to drive safe-haven demand. Heightened geopolitical tensions in the Middle East further support this demand as Israel resumes airstrikes on Gaza, terminating a two-month ceasefire with Hamas, while the U.S. conducts operations against Yemen’s Houthi rebels. Finally, today’s downturn in global equity markets has also increased safe-haven interest in precious metals.

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

here.

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