Dollar Index Hits Four-Month Low Amid Weak Labor Data
The dollar index (DXY00) declined by -0.20% on Friday, marking a four-month low. The dollar has trended downward each day this week, primarily due to the adverse effects of U.S. tariffs on the domestic economy. The drop accelerated on Friday following a dovish U.S. February payroll report. It revealed that nonfarm payrolls rose by only 151,000, below expectations of 160,000, and the unemployment rate unexpectedly increased to 4.1%. Meanwhile, average hourly earnings also fell short of projections, rising just 4.0% year-over-year compared to expectations of 4.1%.
Despite the dollar’s losses, comments from Federal Reserve officials provided some support. Fed Chair Powell stated that the U.S. economy is in a “good place” and does not require immediate policy adjustments. Similarly, Fed Governor Kugler mentioned that it may be appropriate for the Fed to maintain steady interest rates for “some time,” considering inflationary pressures and recent increases in inflation expectations. Additionally, Atlanta Fed President Bostic expressed support for holding monetary policy unchanged in the near future.
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The U.S. February nonfarm payroll increase of 151,000 was below the revised January figure of 125,000, which was adjusted down from 143,000. The February unemployment rate’s increase of +0.1% to 4.1% suggests a weaker labor market than the anticipated stability at 4.0%.
Average hourly earnings rose to 4.0% year-over-year, slightly up from January’s revised 3.9%, but still weaker than the expected 4.1%.
Fed Chair Powell noted that while uncertainty is elevated, the economy remains strong enough to avoid hasty policy changes. It’s important to note that Fed Governor Bowman indicated that the neutral rate, which balances growth without restriction, has likely risen post-COVID-19.
Governor Kugler emphasized the importance of keeping interest rates steady due to inflation risks, while Bostic further remarked on the unpredictability of the economic direction, anticipating it may take several months to gauge the full effects of current economic policies.
The market currently assigns a 4% chance for a -25 basis point rate cut during the upcoming Federal Open Market Committee (FOMC) meeting scheduled for March 18-19.
Euro Gains Strength from Dollar Weakness
The euro (EUR/USD) appreciated by +0.55% on Friday, reaching a new four-month peak. This dollar weakness positively impacted the euro, especially following the upwardly revised Eurozone Q4 GDP figures, now reported at +0.2% quarter-over-quarter and +1.2% year-over-year, up from +0.1% and +0.9% respectively. Moreover, ECB Governing Council member Muller stated the need for caution regarding future interest rate cuts.
However, the Eurozone faced challenges, with Germany’s January factory orders plummeting -7.0% month-over-month, significantly worse than the anticipated -2.5% and marking the steepest decline in a year.
Despite the bearish factor presented by the manufacturing orders, the euro continued to rally, driven by positive market sentiment.
Yen Retreats as Global Factors Pressure Currency
The USD/JPY pair saw a slight increase of +0.05% after the yen fell from a five-month high. Increased U.S. Treasury yields led to profit-taking in the yen, compounded by reports suggesting that the Bank of Japan (BOJ) is likely to maintain steady interest rates at their March 18-19 meeting.
Earlier in the week, a positive signal emerged as Japan’s largest labor union called for the most substantial wage increase since 1993, which could potentially influence BOJ policies.
Precious Metals Prices Slide Amid Market Commentary
April gold (GCJ25) and May silver (SIK25) finished lower, down -12.50 (-0.43%) and -0.529 (-1.59%) respectively. Initial gains in precious metals were diminished by the hawkish remarks from central banks, which put downward pressure on prices. Fed Chair Powell reiterated that the economy’s current strength offers no need for rapid policy changes, while similar sentiments from other Fed officials tempered the demand for gold and silver as hedges against inflation. Furthermore, a decline in U.S. inflation expectations contributed to reduced interest in precious metals.
Although the dollar index’s decline to a four-month low initially boosted precious metals, increased uncertainty surrounding trade tariffs and their potential impact on economic growth weighed heavily on the market. Fund purchases also supported gold, with long positions in ETFs hitting a 15-month high earlier in the week.
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
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