Dollar Index Rises as Market Faces Trade War Concerns

The dollar index (DXY00) increased by +0.26% on Monday. The dollar recovered from early losses, buoyed by a rebound in T-note yields, which improved the dollar’s interest rate differentials. Additionally, hawkish comments from Fed Governor Kugler emphasized inflation concerns stemming from tariffs, prioritizing them over economic growth issues.

Initially, the dollar faced downward pressure due to worries that the escalating global trade war could harm the economy and prompt the Federal Reserve to cut interest rates. The dollar is also grappling with a crisis of confidence as the U.S. renegotiates relationships with trading partners, undermining its reserve-currency status. This situation has led some foreign investors to liquidate their dollar assets.

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In U.S. economic news, February consumer credit unexpectedly fell by -$0.810 billion, contrary to expectations of a +$15.000 billion increase. Fed Governor Kugler commented, “Inflation is being more pressing as far as the effects of tariffs that we’re already seeing” than concerns about economic growth. Markets are pricing in a 43% chance of a -25 bp rate cut following the FOMC meeting scheduled for May 6-7.

The euro also weakened, with EUR/USD (^EURUSD) down by -0.16%. The euro relinquished early gains and recorded moderate losses as a strengthen dollar prompted long liquidation in the currency. Furthermore, disappointing Eurozone economic data weighed on the euro, including retail sales that came in below expectations and a drop in the investor confidence index.

Eurozone retail sales for February rose by +0.3% month-over-month, falling short of the +0.5% expected increase. The Sentix investor confidence index for April dropped -16.6 to a 1.5-year low of -19.5, significantly worse than the anticipated -9.0. Additionally, German industrial production for February contracted by -1.3% month-over-month, also missing the expected decline of -1.0%.

Swaps indicate a 89% likelihood of a -25 bp rate cut by the European Central Bank at the policy meeting on April 17.

In the currency pair USD/JPY (^USDJPY), the dollar rose by +0.46% on Monday. After an initial advancement, the yen declined as stock markets rebounded from early losses, reducing demand for safe-haven assets. The yen initially gained due to heightened safe-haven demand following a slump in global equity markets. Support for the yen also came from reports of stronger-than-expected Japanese labor cash earnings, which have implications for Bank of Japan policy.

Specifically, Japan’s February leading index CI fell by -0.4 to 107.9, better than the expected 107.8. Labor cash earnings rose by +3.1% year-over-year, exceeding the +3.0% forecast.

In commodities, June gold (GCM25) closed down -61.80 (-2.04%), while May silver (SIK25) rose by +0.374 (+1.28%). Precious metals experienced mixed results, with gold sliding to a three-week low, pressured by the dollar’s recovery. A rebound in stock markets also reduced demand for safe-haven precious metals. Additionally, falling inflation expectations weighed on gold, as the U.S. 10-year breakeven inflation rate hit a six-and-a-half-month low.

Concerns regarding the prolonged trade war could negatively impact the global economy, affecting the demand for industrial metals and contributing to bearish sentiments for silver prices. However, the overall escalation of the trade war has increased the safe-haven demand for precious metals.

Geopolitical tensions in the Middle East are also driving up safe-haven demand for precious metals. Recent airstrikes by Israel in Gaza, following a two-month ceasefire with Hamas, alongside U.S. strikes on Houthi rebels in Yemen, have intensified market volatility. Consequently, the selloff in global equity markets has further buoyed demand for 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
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