Dollar Strengthens Amid Trade Tensions and Economic Insights

The dollar index (DXY00) rose by +0.19% on Thursday, driven by concerns over escalating trade tensions that could lead to increased inflation and maintain the Federal Reserve’s restrictive policies. President Trump threatened to impose a 200% tariff on European wines, champagne, and other alcoholic beverages unless the EU eliminates a tax on U.S. whiskey. The decline in stock prices on Thursday also increased demand for dollar liquidity. U.S. economic reports presented mixed signals for the dollar; while weekly jobless claims unexpectedly fell, February’s producer prices increased less than anticipated.

Initial unemployment claims for the U.S. decreased by 2,000 to 220,000, suggesting a stronger labor market than the expected rise to 225,000.

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February’s Producer Price Index (PPI) for final demand showed no change month-over-month and a year-over-year increase of +3.2%, falling short of expected gains of +0.3% month-over-month and +3.3% year-over-year. Moreover, February PPI excluding food and energy dipped by -0.1% month-over-month, with a +3.4% year-over-year increase, again weaker than forecasts of +0.3% and +3.5%, respectively.

Looking ahead for market participants, attention will shift towards U.S. trade policies. The University of Michigan’s consumer sentiment index for March is expected to decrease by -1.2 to 63.5. Additionally, markets will monitor Congress for a spending bill to prevent a government shutdown ahead of the March 15 deadline.

The markets currently assign a mere 1% probability to a -25 basis point rate cut during the upcoming Federal Open Market Committee (FOMC) meeting on March 18-19.

Euro and Yen Respond to Trade Concerns

On Thursday, the EUR/USD (^EURUSD) pair decreased by -0.31%. The euro fell amid concerns of potential tariffs following President Trump’s warning about a 200% tariff on European imports in retaliation for the whiskey tax. Additionally, the euro faced pressure from dovish comments made by ECB Governing Council member and Bundesbank President Nagel, who indicated inflation would return to the ECB’s 2% target by year-end. On a positive note, Eurozone reported a significant increase in January industrial production, marking the largest gain in five months.

In January, Eurozone industrial production rose by +0.8% month-over-month, exceeding expectations of +0.6%. Meanwhile, Nagel stated, “We will achieve price stability this year,” forecasting that inflation will hit the ECB’s target by the end of 2025.

Currently, swaps indicate a 47% chance of a -25 basis point rate cut by the ECB at its April 17 policy meeting.

Yen Gains on BOJ Comments

The USD/JPY (^USDJPY) declined by -0.36% on Thursday. The yen appreciated following hawkish remarks from BOJ Governor Ueda, who expressed confidence in rising wages and consumer spending in Japan. The yen’s gains were bolstered further as Treasury note yields reversed an early increase and declined. However, ongoing trade tensions spurred concerns after Trump referenced Japan’s 204% tariffs on U.S. rice.

Governor Ueda noted that as import inflation decreases, he anticipates improvements in real wages and consumer spending.

Precious Metals Rally Amid Trade War Fears

April gold (GCJ25) closed up +44.50 (+1.51%), while May silver (SIK25) rose +0.563 (+1.67%) on Thursday. Precious metals gained traction as safe-haven assets due to escalating trade tensions. April gold reached a contract high, and nearest-futures gold (H25) set a record high at $2,988.00 per ounce. Silver also achieved a 4.5-month high. The trade threats from Trump significantly increased the appeal of gold and silver as safe havens in light of the weak U.S. PPI report, which suggests a dovish Fed stance.

Despite Thursday’s dollar strength potentially being bearish for metals, concerns over escalating tariffs pose risks to economic growth and demand for industrial metals, putting downward pressure on silver prices.

On the date of publication, Rich Asplund did not hold any positions in the securities mentioned in this article. All information and data are provided solely for informational purposes. For further details, view the Barchart Disclosure Policy
here.

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