Concerns Over Trade War Impact on Inflation and Fed Policy Drive Dollar Rise
The dollar index (DXY00) increased by +0.15% on Wednesday. The rise in the dollar was primarily fueled by worries that an escalating trade war would drive inflation and keep Federal Reserve policies tight following the implementation of US tariffs on steel and aluminum. In response, the EU and Canada retaliated with tariffs on various US goods. However, gains in the dollar were somewhat restrained as the US February Consumer Price Index (CPI) increased less than expected, which could influence a more dovish Fed stance. Furthermore, the strength in stock markets on Wednesday led to a lower demand for dollar liquidity.
In February, the CPI rose by +0.2% month-over-month and +2.8% year-over-year, falling short of predictions of +0.3% and +2.9%, respectively. When excluding food and energy, February’s CPI also rose by +0.2% month-over-month and +3.1% year-over-year, again disappointing relative to forecasts of +0.3% and +3.2%. Notably, the +3.1% year-over-year gain marks the smallest annual increase in nearly four years.
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This week, market participants are closely analyzing US trade policies, especially with the implementation of 25% tariffs on imports of steel and aluminum. On Thursday, the final demand Producer Price Index (PPI) for February is expected to ease to +3.2% year-over-year, down from +3.5% the previous month. Looking ahead to Friday, the University of Michigan’s consumer sentiment index for March is anticipated to decline by -1.2 to 63.5. Additionally, stakeholders will be watching to see if Congress can approve a spending bill before the March 15 deadline to prevent a government shutdown.
Currently, the markets assign only a 1% probability to a -25 basis point rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for March 18-19.
Euro and Yen Response to Market Dynamics
On Wednesday, EUR/USD (^EURUSD) fell by -0.27% as a stronger dollar weighed heavily on the euro. Additionally, dovish remarks from ECB Governing Council member Centeno, who suggested that the central bank should not delay lowering interest rates, further undermined the euro. However, euro losses were mitigated by the 10-year German bund yield rising to a 16-month high, alongside the EU’s retaliatory tariffs on US goods. Furthermore, ECB President Lagarde cautioned that the ECB’s task of managing inflation has grown more challenging.
On the same day, the European Union implemented tariffs on up to $28.3 billion of US imports, targeting products such as soybeans, beef, and poultry, in retaliation for the US tariffs on steel and aluminum.
Centeno reiterated that the ECB should act swiftly on interest rates, expressing a preference to move “sooner rather than later.” Market swaps reflect a 44% chance of a -25 basis point rate cut from the ECB during its policy meeting on April 17.
Turning to the Japanese yen, USD/JPY (^USDJPY) rose by +0.35% on Wednesday. The yen weakened as Japanese economic data showed a drop in February PPI and a decline in Q1 Business Situation Index (BSI) for large industries, both indicating dovish signals for the Bank of Japan (BOJ) policy. The rally in stocks also reduced the demand for the yen as a safe haven. Consequently, yen losses accelerated alongside rising Treasury note yields.
The February PPI in Japan eased to +4.0% year-over-year from +4.2% in January, aligning with expectations. Additionally, the Q1 BSI large all-industry conditions declined to 2.0 from 5.7 in Q4.
Precious Metals Experience Moderate Gains
April gold (GCJ25) closed up +25.90 (+0.89%), while May silver (SIK25) saw an increase of +0.596 (+1.80%). Precious metals prices garnered moderate gains amid growing safe-haven demand due to tensions surrounding trade. The recent 25% tariffs on steel and aluminum imports by the US triggered retaliatory tariffs from the EU and Canada on several US goods. Moreover, the weaker-than-expected CPI report from February is viewed as dovish for Fed policy, which can bolster precious metals prices. Notably, gold received support with long positions in ETFs climbing to a 15-month high. Silver benefited from the surge in copper prices, which reached a 9.5-month high.
Nevertheless, gains in precious metals were moderated by Wednesday’s rally in the dollar and rising global bond yields, both having adverse effects. Additionally, the stock market rebound led to diminished safe-haven demand for these assets.
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 herein are solely for informational purposes. For more information, please view the Barchart Disclosure Policy.
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The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
