Dollar Index Drops After Dovish Economic News and Court Ruling

The dollar index (DXY00) declined by -0.60% on Thursday, retreating from a one-week high. This drop followed favorable U.S. economic data, including a downward revision of the Q1 core PCE price index and a rise in continuing unemployment claims to a 3-1/2 year high. A significant decrease in April pending home sales, the largest in over 2-1/2 years, contributed to these dovish factors for Federal Reserve policy. Additionally, strong stock performance reduced liquidity demand for the dollar. Losses accelerated after comments by Chicago Fed President Goolsbee suggested interest rate cuts could occur if U.S. trade policies resolve.

Initially, the dollar strengthened after a U.S. trade court ruled late Wednesday that some of President Trump’s tariffs were illegal. It also gained support from upward revisions in Q1 GDP data.

In labor market news, U.S. weekly initial unemployment claims rose by 14,000 to 340,000, exceeding expectations of 230,000. Continuing claims also increased by 22,000 to a 3-1/2 year high of 1.919 million, contrasting with predictions of a drop to 1.893 million.

Q1 GDP was revised upward to -0.2% (quarter-over-quarter annualized) from the previous estimate of -0.3%. Meanwhile, the Q1 core PCE price index decreased to 3.4% quarter-over-quarter from the earlier figure of 3.5%.

April pending home sales fell by -6.3% month-over-month, larger than the expected -1.0%, marking the most significant drop in over two years.

Chicago Fed President Goolsbee noted that resolving U.S. trade disputes could help restore the economy to its pre-tariff path, allowing for potential interest rate reductions.

The U.S. Court of International Trade unanimously ruled that President Trump improperly used an emergency justification for his “Liberation Day” tariffs on global goods. This ruling affects Trump’s global 10% tariffs, increased tariffs on China, and fentanyl-related tariffs but does not influence tariffs under Section 232 and Section 301, including those on steel and aluminum. The court has given the administration ten days to implement its ruling.

Currently, the market estimates a 6% chance of a -25 basis point rate cut after the June 17-18 FOMC meeting.

The EUR/USD pair rose by +0.73% on Thursday, recovering from a 1-1/2 week low as the euro rallied following the dollar’s losses. The euro initially dropped when the dollar spiked after the tariff court ruling.

Swaps now suggest a 99% probability of a -25 basis point rate cut by the European Central Bank at its June 5 policy meeting.

USD/JPY fell by -0.52% as the yen recovered from a two-week low against the dollar. This was supported by unfavorable economic news for the dollar and an increase in Japan’s May consumer confidence index, which rose to 32.8, surpassing expectations of 31.8. Additionally, lower T-note yields contributed to the yen’s strength.

The yen initially weakened as the dollar gained ground following the tariff court ruling, but strong global equities reduced safe-haven demand.

June gold (GCM25) closed up +22.20 (+0.67%), while July silver (SIN25) rose by +0.263 (+0.79%). Precious metals prices increased after early losses, aided by a decline in T-note yields and dovish economic news. Comments from Chicago Fed President Goolsbee also boosted precious metals sentiment, suggesting possible interest rate cuts. Ongoing uncertainties in global trade and geopolitical tensions have further supported safe-haven demand for these metals.

Gold initially fell to a one-week low following the tariff court ruling but rallied later as global equity strength diminished safe-haven interest. Easing inflation expectations have also tempered gold demand as a hedge against inflation, following a drop in the U.S. 10-year breakeven inflation rate to a two-week low.

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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy.
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