Dollar Declines Amid Tariff Concerns, Euro Gains on Job Market Strength
Market Reactions to Tariffs and Federal Reserve Comments
The dollar index (DXY00) fell by -0.35% on Tuesday, pressured by worries that President Trump’s new 25% tariffs on steel, aluminum, and finished metals imports might lead to retaliatory actions, ultimately slowing US economic growth. The dollar’s losses were limited, however, due to rising T-note yields, which reinforced the appeal of the dollar’s interest rate advantage. Encouraging comments from Federal Reserve Chair Jerome Powell and Cleveland Fed President Rachael Hammack also supported the dollar when they indicated that interest rates will stay unchanged until inflation decreases further.
Federal Reserve Stance on Monetary Policy
Chair Powell stated, “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”
Meanwhile, Hammack mentioned that it’s sensible for the Fed to maintain steady interest rates for “some time” while awaiting more progress on inflation and reviewing the economic impact of new government policies. Currently, markets estimate just a 6% probability of a -25 basis point cut at the upcoming FOMC meeting scheduled for March 18-19.
Eurozone Economic Data Boosts Euro’s Value
In contrast, EUR/USD (^EURUSD) rose by +0.52% on Tuesday. The euro experienced a mild rally, bolstered by better-than-expected economic data from the Eurozone, particularly an unexpected reduction in the French Q4 unemployment rate. The rate fell by -0.1 to 7.1%, contrary to predictions that it would rise to 7.3%. This upbeat news serves as a positive indicator for European Central Bank (ECB) policy.
However, concerns remain that the escalating trade conflict, initiated by the US tariffs, could potentially disrupt the Eurozone economy. European Commission President Ursula von der Leyen responded quickly, declaring, “unjustified tariffs on the EU will not go unanswered.” Swaps now indicate a 100% chance of a -25 basis point cut by the ECB at its March 6 policy meeting.
Yen Experiences Moderate Losses
USD/JPY (^USDJPY) increased by +0.32% on Tuesday, though the yen fell slightly due to rising T-note yields and the impact of US tariffs. Trading in the yen was somewhat subdued as markets in Japan were closed for the National Foundation Day holiday.
Precious Metals Retreat After Initial Gains
April gold (GCJ25) closed down -1.80 (-0.062%), while March silver (SIH25) fell by -0.169 (-0.52%). Precious metals gave up early gains and closed lower. April gold had previously hit a contract high but turned lower, with nearest-futures (G25) gold retreating from its peak of $2,945.40 an ounce. Hawkish remarks from Fed leaders prompted long liquidation in precious metals, especially after they reaffirmed that interest rates would remain steady until inflation eases.
On the upside, precious metals had initially benefitted from a weaker dollar and increased safe-haven demand following the imposition of US tariffs. Additional support for gold came from Monday’s announcement in China of a pilot program allowing insurance companies to invest up to 1% of their assets in bullion, representing a potential $27.4 billion in new gold purchases.
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 are provided solely for informational purposes. For more details, please see the Barchart Disclosure Policy here.
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