Dollar Index Hits 3-Year Low Amid Confidence Crisis

The dollar index (DXY00) fell by -0.98% on Monday, marking a new three-year low. This decline in the dollar stemmed from renewed concerns about its stability, particularly after National Economic Council Director Hassett indicated that President Trump might consider firing Fed Chair Powell. Such an action could undermine the independence of the Federal Reserve and further erode confidence in the dollar, which is already facing pressure from President Trump’s aggressive trade tariffs. These tariffs have led foreign investors to reduce their dollar assets. Additionally, the dollar remained under pressure following a report that US March leading indicators experienced their largest decline in 17 months.

Specifically, US March leading indicators decreased by -0.7% month-over-month, falling short of expectations that predicted a decline of -0.5% month-over-month, marking the most significant drop in 17 months.

This week, market attention will be focused on potential changes to US trade policies. On Wednesday, March new home sales are anticipated to rise by +0.7% month-over-month to reach 681,000 units. The Fed’s Beige Book will also be released on the same day. Then, on Thursday, March capital goods new orders excluding defense and aircraft are expected to increase by +0.1% month-over-month. Meanwhile, existing home sales for March are projected to drop by -2.8% month-over-month to 4.14 million. Finally, Friday will see the release of the revised University of Michigan’s April consumer sentiment index, with expectations for no change at 50.8.

Markets are currently pricing in a 16% likelihood of a -25 basis point rate cut following the FOMC meeting scheduled for May 6-7, down from a 30% chance reported last week.

The euro gained on Monday, with EUR/USD (^EURUSD) increasing by +1.11% and reaching a three-and-a-half-year high. The dollar’s decline was advantageous for the euro. Additionally, hawkish remarks from ECB Governing Council member Muller indicated that both US trade tariffs and increased public spending in Germany could lead to inflation. However, it should be noted that trading volume in EUR/USD was below average, likely due to many European markets being closed for the Easter Monday holiday.

Swaps currently reflect a 92% chance for a -25 basis point rate cut at the ECB’s June 5 policy meeting.

Meanwhile, the yen saw significant movement, with USD/JPY (^USDJPY) dropping by -1.05%. The yen surged to a seven-month high against the dollar as concerns about the dollar’s stability prompted safe-haven buying. The potential for President Trump to fire Fed Chair Powell raised questions about the Fed’s autonomy, thus negatively impacting the dollar. Furthermore, a Bloomberg report indicated that Bank of Japan (BOJ) officials see little need to adjust their gradual interest rate increase policy, reinforcing the yen’s strength despite uncertainties related to US tariffs. The significant drop in equity markets on Monday also led to increased safe-haven demand for the yen.

On the commodity front, June gold (GCM25) closed up +96.90 (+2.91%) while May silver (SIK25) climbed +0.051 (+0.16%). Precious metals witnessed a surge, with June gold reaching a contract high and nearest-futures gold posting an all-time high of $3,418.50 an ounce. The dollar index’s slump to a three-year low contributed significantly to this positive trend in precious metals. Furthermore, the crisis of confidence in the dollar led to greater interest in precious metals as a reliable store of value, particularly as President Trump threatens to dismiss Fed Chair Powell. Ongoing tensions from the US-China trade war are also pushing up demand for precious metals as safe-haven investments, compounded by geopolitical risks following the breakdown of the Israel-Hamas ceasefire and continued US military actions in Yemen.

Interestingly, higher Treasury note yields on Monday could be seen as bearish for precious metals. Additionally, the same Bloomberg report highlighting BOJ policymakers’ lack of urgency to change their policy stance has potential negative implications for precious metals. Concerns regarding a possible slowdown in economic growth due to the US-China trade war may have also limited gains in silver.

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 in this article are for informational purposes only. For more details, please view the Barchart Disclosure Policy here.

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