Dollar Index Surges to 3.5-Week High Amid Trade Deal Optimism
The dollar index (DXY00) rose by +1.04% on Thursday, reaching a 3-1/2 week high. This surge was fueled by easing global trade tensions following President Trump’s announcement of a new comprehensive trade deal with the UK. Supporting the dollar further were USD weekly jobless claims, which fell more than anticipated, and an unexpected rise in Q1 unit labor costs—both indicators that strengthen the Federal Reserve’s policy stance. Additionally, the dollar gained momentum as President Trump indicated a willingness to lower tariffs against China if the weekend trade talks go well.
U.S. Labor Market Shows Strength
Initial unemployment claims in the U.S. dropped by -13,000 to 228,000, demonstrating a stronger labor market than the expected figure of 230,000.
In terms of productivity, Q1 nonfarm productivity fell by -0.8%, aligning with expectations and marking the first decline in 2-3/4 years. In contrast, Q1 unit labor costs rose by +5.7%, better than the anticipated +5.1%—the most significant increase in a year.
The market is currently assigning a 20% probability to a -25 basis point interest rate cut following the June 17-18 FOMC meeting.
Euro Weakens Against the Dollar
EUR/USD (^EURUSD) fell by -0.73% on Thursday, reaching a 3-1/2 week low. Initially, the euro gained ground after German March industrial production exceeded expectations, rising by +3.0% month-over-month versus a forecast of +1.0%. However, the euro turned lower as the dollar rallied sharply due to positive U.S. trade news. Furthermore, increased German bund yields strengthened the euro’s interest rate differentials.
Mixed German Trade Data
German March exports saw a +1.1% month-over-month rise, surpassing expectations of +1.0%. However, March imports unexpectedly fell by -1.4% month-over-month, contrary to expectations for a +0.4% increase.
Swaps are indicating a 95% chance of a -25 basis point rate cut by the European Central Bank (ECB) at the June 5 policy meeting.
JPY Declines Against USD
USD/JPY (^USDJPY) rose by +1.50% on Thursday, as the yen dropped to a 4-week low against the dollar. Reduced safe-haven demand following Trump’s trade deal announcement eased global trade tensions, placing additional pressure on the yen. The BOJ’s dovish minutes from the March 18-19 meeting also acted to weaken the yen further, with one member stating that the BBJ would need to be particularly cautious about rate hikes if U.S. tariffs pose a severe impact.
Precious Metals Retreat
June gold (GCM25) closed down -85.90 (-2.53%), and July silver (SIN25) fell -0.174 (-0.53%). Precious metals prices declined as the dollar index hit a 3-1/2 week high. Easing global trade tensions have diminished safe-haven demand for these assets. Moreover, rising global bond yields weighed on precious metals. Losses in this sector intensified after Fed Chair Powell indicated no immediate need for rate adjustments.
Losses in silver prices saw some respite thanks to increased industrial demand spurred by the substantial rise in German March industrial production. The new U.S.-UK trade deal raises hopes for reduced tariffs, benefiting industrial metals demand.
An interest rate cut by the Bank of England (BOE) provided some positive sentiment for precious metals, as lower rates can enhance their appeal as a store of value. Escalating geopolitical risks, particularly in South Asia following India’s military actions and the ongoing Israel-Hamas conflict, have also driven safe-haven demand for precious 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 are provided solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.
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