Dollar Index Drops to Four-Month Low Amid Tariff Concerns

The dollar index (DXY00) is down -0.42%, hitting a four-and-a-half month low. This decline follows the U.S. announcement of tariffs on Canada, China, and Mexico, raising fears of an impending trade war that could impact the economy severely. However, the dollar did recover slightly today after U.S. JOLTS job openings for January increased more than anticipated. Also, ongoing weakness in the stock market has led to a greater demand for dollar liquidity.

In January, JOLTS job openings rose by +232,000 to 7.74 million, surpassing expectations of remaining unchanged at 7.60 million and indicating weaker-than-expected labor market conditions.

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This week, market focus shifts to the upcoming February U.S. CPI report, set to be released on Wednesday. Analysts expect a slight easing to +2.9% year-over-year from +3.0% in January. Core CPI for February is also projected to decline to +3.2% from +3.3% in January. Additionally, U.S. trade policies will be scrutinized, especially with 25% tariffs on imports of steel and aluminum scheduled to take effect on Wednesday. On Thursday, the final-demand PPI for February is anticipated to ease to +3.2% year-over-year from +3.5% in January. Finally, on Friday, the University of Michigan’s March consumer sentiment index is expected to dip by -1.2 to 63.5. Moreover, market participants are looking to Congress to finalize a spending bill to prevent a government shutdown ahead of the March 15 deadline.

Currently, the markets are pricing in a 4% likelihood of a -25 basis point rate cut at the next FOMC meeting on March 18-19.

In currency trading, EUR/USD (^EURUSD) is up by +0.73%, reaching a four-month high. The decrease in the dollar supports the euro, which also gained after a statement from the leader of Germany’s Green Party indicating readiness to negotiate on defense spending issues with Germany’s prospective ruling coalition, led by Chancellor-in-waiting Merz.

Swaps currently indicate a 52% chance of a -25 basis point rate cut by the European Central Bank (ECB) during its policy meeting on April 17.

Meanwhile, USD/JPY (^USDJPY) climbed by +0.31%. Although the yen fell back from a five-and-a-quarter month high against the dollar, it remains moderately lower. Weaker-than-expected Japanese economic data has pressured the yen, while higher T-note yields have also weighed on its performance. For reference, January household spending in Japan increased by +0.8% year-over-year, significantly missing expectations of +3.7%. Additionally, Japan’s Q4 GDP was revised down to +2.2% (annualized quarter-over-quarter) from the previously reported +2.8%. On a more positive note, February machine tool orders rose +3.5% year-over-year, marking the fifth consecutive monthly increase.

Turning to commodities, April gold (GCJ25) is up by +27.00 (+0.93%), while May silver (SIK25) has risen +0.735 (+2.26%). Precious metals prices have rebounded from overnight losses today. The dollar’s slump to a four-and-a-half month low is supportive of metals prices. Furthermore, there remains strong demand for precious metals due to safe-haven appeals amid U.S. tariffs and the potential for retaliation. Gains intensified after President Trump increased tariffs to 50% on steel and aluminum imports from Canada.

Despite this, higher global government bond yields today pose a bearish outlook for precious metals. Silver prices, in particular, are under pressure due to the downward revision in Japan’s Q4 GDP, which affects industrial metal demand. Concerns over U.S. tariff policies and the possibility of a trade war that could dampen economic growth are also causing market jitters.

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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.

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