Dollar Weakens Amid Shifting Tariff Plans and Mixed Economic Data
The dollar index (DXY00) has decreased by -0.64% today. Following a report from the Washington Post, the dollar’s decline is attributed to potential changes in tariff plans by President-elect Trump’s aides, who are considering limits to only critical imports. If this plan goes ahead, it could lead to less disruption in global trade and a smaller inflation impact, suggesting a more relaxed stance for Federal Reserve policy.
Market Conditions and Fed Insights
Today’s stock market rally has lowered the demand for dollar liquidity. Economic indicators presented mixed signals for the dollar, while supportive comments from San Francisco Fed President Daly alongside Fed Governors Cook and Kugler strengthened the dollar’s position.
In December, the US S&P services PMI was revised down by -1.7, settling at 56.8 from a previous estimate of 58.5. Additionally, US factory orders for November fell by -0.4% month-over-month, slightly below expectations of -0.3% month-over-month. However, revisions showed October’s factory orders rising by +0.5% month-over-month, adjusted from +0.2%.
The comments from Fed officials were notably hawkish. President Daly noted ongoing inflation concerns, stating it remains “uncomfortably above our target.” Fed Governor Kugler added that inflation has not yet met the 2% target, emphasizing the job ahead. Likewise, Governor Cook remarked on the resilient labor market and stubborn inflation, suggesting that the Fed could take a more cautious approach to future rate reductions.
Currently, markets estimate only a 9% chance for a -25 basis point rate cut during the January 28-29 FOMC meeting.
Euro Strengthens Alongside Positive Economic News
Meanwhile, the EUR/USD (^EURUSD) has gained +0.69%. The euro’s strength emerged as the dollar weakened after news about potential alterations in tariff plans. The rise in the euro was further supported when the 10-year German bund yield reached a two-month peak, coinciding with a stronger-than-expected German December consumer price report, hinting at a more hawkish direction for ECB policy. Additionally, the Eurozone saw positive developments in the December S&P composite PMI and the January Sentix investor confidence index, reinforcing the euro’s gain.
January’s Sentix investor confidence index fell slightly by -0.2 to a 14-month low of -17.7, managing to exceed expectations of -17.9. However, the December S&P composite PMI saw a small upward revision of +0.1 to 49.6. Moreover, German December CPI (EU harmonized) rose by +0.7% month-over-month and +2.9% year-over-year, surpassing forecasts of +0.5% month-over-month and +2.6% year-over-year, marking the best annual hike in 11 months.
Swaps are pricing in a 98% probability that the ECB will implement a -25 basis point rate cut at its upcoming meeting on January 30.
Yen Response to Interest Rate Trends
For the USD/JPY (^USDJPY), the exchange rate increased by +0.18%. The yen lost its overnight gains due to rising T-note yields and a downward revision to Japan’s December Jibun Bank services PMI, which decreased by -0.5 to 50.9 from a previous 51.4. Initially, the yen appreciated as BOJ Governor Ueda indicated that the Bank of Japan would continue to raise interest rates with ongoing economic improvement. The dollar’s overall weakness also lent support to the yen due to the prospect of reduced US tariffs.
Precious Metals: Diverging Trends Amid Safe-Haven Demand
February gold (GCG25) has fallen -11.20 (-0.42%), while March silver (SIH25) has risen +0.530 (+1.76%). The precious metals market is displaying mixed movements, driven in part by silver reaching a 2-1/2 week high. A weaker dollar typically boosts metal prices, but current geopolitical tensions, including the volatile situations in Syria and Ukraine, are also supporting safe-haven demand for these assets.
Despite this, gold prices declined today, largely due to rising stock markets and hawkish remarks from central bank officials, who dampened its appeal as a safe-haven asset. President Daly reiterated concerns about inflation remaining high, while Governor Ueda indicated intentions to continue adjusting interest rates as economic conditions evolve.
On the date of publication, Rich Asplund did not hold (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data provided are for informational purposes only. Please view Barchart’s Disclosure Policy for more details.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
