Dollar Slips as Markets React to Inflation Data and Global Events

The dollar index (DXY00) is down -0.09% today, reflecting moderate losses prompted by a reduced demand for safe-haven assets. The shift comes amid a strong rally in stock markets, driven by improved prospects for a U.S. spending bill that may prevent a government shutdown. Additionally, the euro gained strength after a report indicated that Germany’s political parties reached an agreement on a debt package. However, the dollar managed to recover a significant portion of its losses following an unexpected rise in U.S. inflation expectations as reported by the University of Michigan.

Consumer Sentiment and Inflation Expectations

The University of Michigan’s consumer sentiment index for March fell sharply by -6.8 points, reaching a 2-1/3 year low of 57.9. This result was considerably weaker than the anticipated figure of 63.0.

In another unexpected turn, the University of Michigan’s 1-year inflation expectations indicator rose to a 2-1/3 year high of +4.9%, surpassing expectations which had anticipated no change. Furthermore, the 5-10 year inflation expectations increased to a 32-year high of 3.9%, contrary to forecasts that called for a decrease to 3.4%.

In response, markets are discounting the likelihood of a -25 basis point rate cut during the next Federal Open Market Committee (FOMC) meeting on March 18-19, estimating the chances at just 1%.

EUR/USD and Eurozone Economic Developments

The EUR/USD pair (^^EURUSD) has risen by +0.27%. The euro’s ascent can be attributed to a report from Handelsblatt stating that the incoming German Chancellor Merz has reached a fiscal reform agreement with the Green party. This development is expected to boost infrastructure and defense investments, which, in turn, raised German bund yields and strengthened the euro’s interest rate differentials. Additionally, hawkish comments from European Central Bank (ECB) Governing Council member Holzmann, supporting a pause on further rate cuts, provided further support to the euro. However, a downward revision to the German February CPI acted as a bearish element for the euro.

The revised German Fed CPI (European Union harmonized) was adjusted downward to +0.5% m/m and +2.6% y/y, compared to the previously reported +0.6% m/m and +2.8% y/y.

Perspectives from ECB Officials

Holzmann has indicated that interest rates in the Eurozone are now at neutral levels and expressed his support for pausing any ECB rate cuts during the next meeting. He highlighted that a resurgence in inflation poses a significant risk, and increased European spending might compel the ECB to consider raising interest rates.

Market swaps currently place the odds of a -25 basis point rate cut by the ECB at 47% for the upcoming April 17 policy meeting.

The Yen and Market Reactions

The USD/JPY pair (^^USDJPY) has climbed by +0.51%. The yen is under pressure today due to rising Treasury note yields. The strength in global equity markets has diminished the yen’s appeal as a safe-haven investment. Nevertheless, losses in the yen are limited as Japan’s largest labor union, Rengo, announced an average wage increase of 5.46% for the coming fiscal year, the highest in over three decades. This news could influence the Bank of Japan’s (BOJ) monetary policy moving forward.

Trends in Precious Metals

Gold for April delivery (GCJ25) is up by +8.90 (+0.30%), while May silver (SIK25) has increased by +0.054 (+0.16%). Precious metals are experiencing gains today, with April gold reaching a contract high and nearest-futures gold (H25) establishing a record at $3,004.80 an ounce. The weaker dollar is supportive for metals, boosted further by escalating trade tensions. The U.S. has recently imposed a 25% tariff on Canadian and Mexican goods while doubling tariffs on Chinese goods from 10% to 20%, prompting retaliatory measures from China, the EU, and Canada.

Despite initial gains, precious metals faced pullbacks as the University of Michigan’s rise in inflation expectations added a hawkish element for the Fed’s policy stance. Higher global bond yields also weighed on precious metal prices. The stock market rally has further dampened safe-haven demand for these assets, while concerns regarding the potential effects of tariffs on economic growth and industrial metal demand have pressured silver prices.

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
here.

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