The dollar index (DXY00) Monday rose by +0.52% and posted a 3-week high. The dollar jumped Monday after President Trump imposed 25% tariffs on goods from Canada and Mexico and a 10% tariff on Chinese goods, effective Tuesday. The dollar also found support on Monday’s plunge in the Canadian dollar to a nearly 22-year low. In addition, Monday’s slump in stocks boosted liquidity demand for the dollar. The dollar raced to its highs Monday after the US ISM manufacturing and construction spending reports were stronger than expected.
The dollar fell back from its best levels after President Trump agreed to delay tariffs on Mexico for a month after conversing with Mexican President Sheinbaum.
The US Jan ISM manufacturing index rose +1.7 to 50.9, which is stronger than expectations of 50.0 and the highest level in 2-1/3 years.
US Dec construction spending rose +0.5% m/m, stronger than expectations of +0.2% m/m.
Fed comments Monday were mixed for the dollar. On the positive side, Atlanta Fed President Bostic said he wants to wait “a while” before cutting interest rates again following last year’s reductions amid uncertainty over where the US economy is headed in 2025. Conversely, Boston Fed President Collins said the Fed is unlikely to react to the impact of tariffs on prices so long as policymakers don’t see signals of higher, persistent inflation.
The markets are discounting the chances at 14% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
EUR/USD (^EURUSD) Monday fell by -0.67% and posted a 2-year low. The euro retreated Monday after President Trump threatened to impose tariffs on the Eurozone, which would undercut economic growth and possibly push the Eurozone economy into recession. Also, dovish comments Monday from ECB Governing Council member Simkus pressured the euro when he said he sees additional ECB interest rate cuts beyond the March policy meeting.
EUR/USD recovered from its worst levels after Eurozone Jan CPI rose more than expected and the Eurozone Jan S&P manufacturing PMI was revised higher, hawkish factors for ECB policy.
Eurozone Jan CPI rose +2.5% y/y, stronger than expectations of +2.4% y/y. Also, Jan core CPI rose +2.7% y/y, stronger than expectations of +2.6% y/y.
The Eurozone Jan S&P manufacturing PMI was revised upward by +0.5 to an 8-month high of 46.6 from the previously reported 46.1.
ECB Governing Council member Simkus said, “Going forward, we can allow ourselves a looser policy,” and the ECB is likely to lower borrowing costs beyond its next meeting in March.
Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at the March 6 policy meeting.
USD/JPY (^USDJPY) Monday fell by -0.27%. The yen rose Monday as the slump in global equity markets boosted safe-haven demand for the yen. Higher government bond yields have also strengthened the yen’s interest rate differentials as Monday’s 10-year JGB bond yield rose to a 13-year high of 1.264%. In addition, lower T-note yields on Monday were supportive of the yen.
The Japan Jan Jibun Bank manufacturing PMI was revised lower to 48.7 from the previously reported 48.8.
April gold (GCJ25) Monday closed up +22.10 (+0.78%), and March silver (SIH25) closed up +0.261 (+0.81%). Precious metals settled moderately higher on Monday, with April gold posting a contract high and nearest-futures (G25) posting a record high of $2,848.40 an ounce. Safe-haven demand boosted precious metals prices Monday due to global trade war fears after the US imposed 25% tariffs on imports from Canada and Mexico and a 10% tariff on Chinese goods. Also, Monday’s slide in T-note yields and stock prices were bullish for precious metals. In addition, dovish comments Monday from ECB Governing Council member Simkus boosted demand for gold as a store of value when he said he sees additional ECB interest rate cuts beyond the March policy meeting. Gains in silver accelerated after the US ISM manufacturing and construction spending reports rose more than expected, which is a supportive factor for the demand for industrial metals.
Gold prices fell back from their best levels Monday after President Trump agreed to delay tariffs on Mexico for a month. Also, hawkish comments from Atlanta Fed President Bostic weighed on precious metals when he said it might be a while before the next Fed interest rate cut. In addition, Monday’s rally in the dollar index to a 3-week high was bearish for metals. Industrial metals prices were undercut by concern that a global trade war could derail economic growth and industrial metals demand.
