Dollar Weakness Persists as Economic Indicators Shift
The dollar index (DXY00) fell by -0.50% today, reaching its lowest point in a week. This drop followed a steep decline observed on Tuesday when the yield on the 10-year Treasury note decreased to a seven-week low. Additionally, favorable wage data from Japan propelled the yen to a seven-week high against the dollar. The widening of the US trade deficit in December to its largest size in 2 years and 9 months also contributed to the dollar’s weakness. The currency extended its losses after a disappointing ISM services index for January.
On the positive side for the dollar, the US December ADP employment report came in stronger than anticipated, showing a rise of +183,000 jobs compared to expectations of +150,000. Furthermore, comments from Richmond Fed President Barkin suggested a preference for maintaining stable interest rates, which offered some support for the dollar. Additionally, current stock market weaknesses increased the demand for dollar liquidity.
The US December ADP employment change surpassed expectations at +183,000, while the November figure was revised higher to +176,000 from +122,000. In contrast, the US December trade deficit was reported at -$98.4 billion, marking the largest gap in 2 years and 9 months and wider than the anticipated -$96.8 billion, which negatively impacts Q4 GDP outlook. The US January ISM services index saw a significant decline of -1.2, dropping to 52.8, below the expected 54.0.
Richmond Fed President Barkin emphasized the need for more time to gauge the direction of the US economy amid uncertainties related to President Trump’s policies, indicating a desire to keep interest rates unchanged. The markets are currently pricing in a 17% probability for a -25 basis point rate cut in the upcoming FOMC meeting scheduled for March 18-19.
Meanwhile, EUR/USD (^EURUSD) saw a rise of +0.44%. The weakened dollar sparked short covering for the euro, which gained momentum following hawkish remarks from ECB Chief Economist Lane, stating that new inflationary risks could emerge and that the slowdown in inflation may take longer than expected to stabilize.
In December, Eurozone PPI increased by +0.4% month-over-month, remaining unchanged year-over-year, closely matching projections of +0.5% month-over-month and -0.1% year-over-year. The swaps market is fully pricing in a -25 basis point rate cut by the ECB at their policy meeting on March 6.
In the USD/JPY (^USDJPY) exchange, the dollar decreased by -1.35%. The yen surged to a seven-week high driven by better-than-expected wage data from Japan, signaling a potential pivot in Bank of Japan policy. Support for the yen also came from an upward revision to Japan’s January Jibun Bank services PMI and a significant jump in the 10-year Japanese Government Bond yield, now at a thirteen-year high of 1.301%. Furthermore, the dip in Treasury yields favored the yen.
Japan’s labor cash earnings rose +4.8% year-over-year in December, exceeding expectations of +3.7% year-over-year and marking the largest increase in 27 years. The January Jibun Bank services PMI was revised up by +0.3 to 53.0 from 52.7.
In commodity markets, April gold (GCJ25) rose +22.10 (+0.77%), while March silver (SIH25) fell -0.032 (-0.10%). Precious metals exhibited mixed performance, with April gold reaching a contract high and nearest futures (G25) hitting an all-time high of $2,879.10 an ounce. The dollar’s decline to a one-week low proved beneficial for metal prices. The drop in the 10-year Treasury yield added further support to precious metals, with safe-haven demand remaining robust due to ongoing US-China trade tensions after recent tariff disputes.
Hawkish commentary from central bankers also supported precious metals. Richmond Fed President Barkin reiterated a preference for stable interest rates, while ECB Chief Economist Lane mentioned that the inflation slowdown “might take longer than thought.”
However, silver faced downward pressure after the US January ISM services index declined more than expected, alongside a surprise drop in China’s January Caixin services PMI, now at a four-month low. These developments negatively affected industrial metals demand. Moreover, industrial metals were further pressured by the US’s recent imposition of a 10% tariff on Chinese goods and China’s retaliatory measures, raising concerns over a potential trade war that could hinder economic growth and reduce demand for industrial metals.
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.
More news from Barchart
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
