Dollar Weakens Amid Rising Trade Deficit Concerns
The dollar index (DXY00) declined by 0.57% on Tuesday, primarily due to worries that US trade policies could lead to economic stagflation. These losses intensified following the release of the March trade deficit, which widened to a record high, negatively impacting Q1 GDP projections.
Record Trade Deficit Signals Economic Challenges
In March, the US trade deficit reached a staggering -$140.5 billion, surpassing expectations of -$137.2 billion. This widening deficit is anticipated to affect Q1 GDP adversely.
Market Response and Rate Cut Prospects
The financial markets are currently pricing in only a 2% chance of a -25 basis point rate cut following the upcoming two-day FOMC meeting.
Euro Gains Ground Against the Dollar
The EUR/USD (^EURUSD) rose by 0.51% on Tuesday, benefiting from a weaker dollar. The euro’s advance was supported by a positive revision to the Eurozone’s April S&P composite PMI, which increased by 0.3, reaching 50.4 from the previously reported 50.1. However, gains were somewhat capped by a weaker-than-expected Eurozone March Producer Price Index (PPI), which reflected a decline of 1.6% month-over-month and a year-over-year increase of only 1.9%, below the anticipated 2.5%.
ECB Rate Cut Speculations
Market swaps indicate a 95% likelihood of a -25 basis point rate cut from the European Central Bank (ECB) during its policy meeting on June 5.
Yen Strengthens Amid Safe-Haven Demand
The USD/JPY (^USDJPY) fell by 0.89% on Tuesday as the yen gained against the dollar, driven by weak stock performance linked to US trade disputes. Increased safe-haven demand for the yen also supported its value, with lower T-note yields contributing to this trend. However, some of Tuesday’s movements in the yen might be accentuated due to the closure of Japanese markets for a national holiday.
Precious Metals Rally
On Tuesday, June gold (GCM25) closed at $3.03 higher (+3.03%), while July silver (SIN25) rose by $0.907 (+2.79%). Precious metals experienced sharp gains, with gold reaching a two-week high and silver achieving a one-week high. The dollar’s weakness during the day was favorable for metal prices, fueled by increasing global trade tensions spurred by US tariff policies, which heightened demand for safe-haven assets. Additionally, rising inflation expectations boosted interest in precious metals as an inflation hedge, particularly as the 10-year breakeven inflation rate hit a one-week peak. Ongoing geopolitical tensions in the Middle East, notably the Israel-Hamas conflict, have added to the safe-haven allure of precious metals. Israel recently launched airstrikes against Houthi positions in Yemen in response to prior missile attacks.
On the date of publication, Rich Asplund did not hold any positions in the securities mentioned in this article. All information and data provided are for informational purposes only. For more details, please refer to the Barchart Disclosure Policy here.
The views expressed in this article are those of the author and may not reflect the views of Nasdaq, Inc.
