Dollar Surges to One-Month High Amid Easing Tariff Tensions

The dollar index (DXY00) rallied sharply Monday, reaching a one-month high and ending up by +1.48%. This surge was propelled by an agreement between the US and China to temporarily lower tariffs on each other’s products. Additionally, a leap in the 10-year T-note yield to a four-week high bolstered the dollar’s interest rate differentials. The upbeat stock market and reduced trade tensions also diminished the likelihood of the Federal Reserve cutting interest rates, adding further support for the dollar. However, the dollar retreated slightly from its peak after Fed Governor Kugler expressed concerns that US tariff policies might increase inflation and hinder economic growth, despite the recent tariff reductions with China.

US-China Tariff Agreement Details

The US and China agreed to a three-month reduction of tariffs on each other’s products, with the US cutting its tariffs on Chinese goods from 145% to 30%, and China lowering its duties from 125% to 10%. Treasury Secretary Bessent remarked that both nations aim to avoid “decoupling” and that upcoming talks may lead to “purchasing agreements” with China.

Fed Governor Kugler warned that current US tariff policies could lead to increased inflation and negative impacts on economic growth. She also noted potential “significant effects” on productivity, suggesting that businesses may reduce investment and engage in less efficient practices to adapt to these tariffs.

Market Expectations for Interest Rates

The markets currently estimate an 8% chance of a -25 basis point rate cut following the June 17-18 FOMC meeting. In contrast, the euro (EUR/USD) fell to a one-month low, down by -1.40%, due to the dollar’s rally. This decline in the euro was intensified when ECB Governing Council member Kazaks indicated the possibility of another ECB interest rate cut.

Kazaks stated, “The financial markets at the moment are expecting another ECB rate cut in June, and with today’s data, I see that as a likely step.”

Swaps reflect an 83% probability of a -25 basis point rate cut by the ECB at their June 5 policy meeting.

Currency Movements: Yen and Precious Metals

The USD/JPY currency pair rose by +2.01% on Monday, with the yen falling to a five-week low against the dollar. This decline was linked to reduced demand for safe-haven assets after the US and China announced tariff reductions. Additionally, easing geopolitical tensions, such as the ceasefire agreement between India and Pakistan and Ukraine President Zelenskiy’s upcoming negotiations with Russian President Putin, further diminished safe-haven demand for the yen. Moreover, Japan’s eco watchers outlook survey dropped sharply to a four-year low of 42.7, below expectations of 44.6, adding bearish sentiment toward the yen.

In the precious metals market, June gold (GCM25) closed down -116.00 (-3.47%), while July silver (SIN25) fell -0.290 (-0.88%). The surging dollar index significantly impacted precious metals, driving prices to one-week lows. Easing trade tensions played a role in this decline, as a rising stock market prompted long liquidations in precious metals. Furthermore, a decrease in global geopolitical risks affected demand negatively for these assets. Still, losses in silver were mitigated by positive outlooks regarding economic growth, supported by reduced US-China trade tensions, which may buoy industrial metal demand. Worry remains over ongoing geopolitical risks in the Middle East, particularly with the Israel-Hamas conflict and related military actions in Yemen.

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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