The Dollar Gains Ground Amid Mixed Economic Signals and European Uncertainty
The dollar index (DXY00) rose by +0.21% on Friday, benefiting from weakness in the euro. The EUR/USD currency pair faced pressure ahead of the German elections scheduled for this weekend. Additionally, a sell-off in the stock market increased demand for the dollar due to higher liquidity needs.
Consumer Sentiment Plummets as Market Reactions Hit
Despite initial gains, the dollar retreated from its high on Friday after the University of Michigan’s US February consumer sentiment index fell to a 15-month low. This drop, revised down by -3.1 to 64.7, came as existing home sales in January also declined more than anticipated, dropping -4.9% month-over-month to 4.08 million, compared to expectations of just a -2.6% decrease.
Mixed Manufacturing and Services Data Highlight Economic Concerns
The US February S&P Global manufacturing PMI rose +0.4 to an 8-month high of 51.6, outpacing expectations of 51.4. In contrast, the February S&P Global services PMI unexpectedly fell -3.2 to 49.7, marking the steepest contraction pace in two years and coming in well below the predicted rise to 53.0.
Expectations concerning inflation also shifted dramatically. The University of Michigan’s US February 1-year inflation expectations remained constant at 4.3%, but the 5- to 10-year expectations unexpectedly surged to a 29-year high of 3.5%, exceeding the forecast of no change at 3.3%.
Market forecasts now suggest a slim 2% chance of a 25 basis point cut in rates during the Federal Open Market Committee meeting on March 18-19.
Euro Faces Pressure Amid Election Uncertainty
The euro (EUR/USD) fell by -0.37% on Friday, influenced by mixed Eurozone PMI reports and a rush to close positions before the snap election in Germany. The outcome of the election remains uncertain, which raises concerns about a divided parliament and prolonged coalition negotiations that could undermine economic recovery efforts. This scenario poses additional risks for the euro.
February’s S&P Eurozone manufacturing PMI increased +0.7 to 46.6, although this was still below expectations of 47.0. The composite PMI held steady at 50.2, which is weaker than the forecast for an increase to 50.5.
Total market expectations are now at 98% for a 25 basis point cut from the European Central Bank at their meeting on March 6.
The Yen Strengthens but Faces Challenges
The USD/JPY currency pair fell by -0.42% as the Japanese yen hit a 2.5-month high against the dollar. This gain was driven by a higher-than-expected rise in Japan’s January consumer prices, which increased +4.0% year-over-year, aligning with forecasts and representing the fastest growth in two years. However, despite this positive data, the yen briefly lost ground after Bank of Japan (BOJ) Governor Ueda suggested that the BOJ might increase bond purchases if yields rise too quickly.
In January, Japan’s national CPI excluding fresh food and energy also rose by +2.5% year-over-year, matching expectations for its highest rate in ten months. The February Jibun Bank manufacturing PMI rose slightly by +0.2 to 48.9.
Governor Ueda emphasized the BOJ’s commitment to stabilizing yield fluctuations: “If long-term yields rise sharply, we will purchase government bonds nimbly to foster a stable formation of yields.”
Precious Metals Experience Moderate Losses
On Friday, April gold (GCJ25) closed down -2.90 (-0.10%), and March silver (SIH25) decreased by -0.474 (-1.42%). Precious metals faced pressure from a stronger dollar, compounded by negative sentiment after Treasury Secretary Bessent downplayed speculation about devaluing US government bullion holdings. Although impacted by these factors, losses were somewhat offset by BOJ Governor Ueda’s comments, which fueled demand for precious metals as safe-haven assets amid uncertainty.
Increased ETF long positions in gold reached a 13-month high, which supported prices. Furthermore, ongoing geopolitical tensions and concerns over President Trump’s policies have heightened the appeal of precious metals as a refuge for investors.
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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