The dollar index (DXY00) Wednesday rose by +0.87%. The dollar rallied Wednesday due to an easing of the harsh trade rhetoric against China after President Trump said he plans to be "very nice" to China in any talks and that tariffs will drop if the two countries can reach a trade deal. Also, confidence in the dollar improved after President Trump said late Tuesday that he had no intention of firing Fed Chair Powell.
Hawkish comments from Fed Governor Kugler also boosted the dollar when she said she supports holding interest rates steady until inflation risks abate. The dollar extended its gains on Wednesday's stronger-than-expected US new home sales and manufacturing PMI reports.
The US Apr S&P manufacturing PMI unexpectedly rose +0.5 to 50.7, stronger than expectations of a decline to 49.0
US Mar new home sales rose +7.4% m/m to a 6-month high of 724,000, stronger than expectations of 685,000.
Fed Governor Kugler said tariffs will likely put upward pressure on prices and have a bigger economic effect than previously expected. She also said that she supports holding interest rates steady until inflation risks abate.
The Fed's Beige Book was neutral for the dollar as it stated that US economic activity was little changed in the month before April 14 from the prior report, with employment little changed to up slightly in most districts and price increases modest to moderate.
This week's market focus will be on any changes to US trade policies. Thursday brings March capital goods new orders nondefense ex-aircraft and parts report (expected +0.1% m/m). Also, March existing home sales on Thursday are expected to fall -2.8% m/m to 4.14 million. Friday brings the revised University of Michigan April consumer sentiment index (expected no change at 50.8).
The markets are discounting the chances at 8% for a -25 bp rate cut after the May 6-7 FOMC meeting, down from a 30% chance last week.
EUR/USD (^EURUSD) Wednesday fell by -0.88%. The euro was under pressure on Wednesday from a stronger dollar. Also, comments from ECB Governing Council member Nagel undercut the euro when he said Europe "is in a stagnating situation" due to fallout from US tariffs. Losses in the euro accelerated Wednesday due to dovish comments from ECB Governing Council member Villeroy de Galhau, who said he sees no inflation risks and that further ECB rate cuts are likely. On the positive side for the euro was Wednesday's news that showed the Eurozone Apr S&P manufacturing PMI unexpectedly rose to a 2-1/4 year high.
The Eurozone Apr S&P manufacturing PMI unexpectedly rose +0.1 to a 2-1/4 year high of 48.7, stronger than expectations of a decline to 47.4. However, the Apr S&P composite PMI fell -0.8 to 50.1, weaker than expectations of 50.2.
ECB Governing Council member and Bundesbank President Nagel said Europe "is in a stagnating situation" due to fallout from US tariffs with a "risk of recession for Germany."
ECB Governing Council member Villeroy de Galhau said, "There is no currently no inflationary risk in Europe, and it is therefore both fair and appropriate that compared to the Federal Reserve and Bank of England, the ECB has started cutting interest rates earlier, faster, and likely further this year."
Swaps are discounting the chances at 86% for a -25 bp rate cut by the ECB at the June 5 policy meeting.
USD/JPY (^USDJPY) Wednesday rose by +1.24%. The yen fell to a 1-week low against the dollar Wednesday as the dollar strengthened after President Trump said he has no intention of firing Fed Chair Powell. Also, an easing of US-China trade tensions ignited a rally in the Nikkei Stock Index today to a 3-week high, reducing safe-haven demand for the yen. Losses in the yen accelerated today after US Treasury Secretary Bessent said the US isn't seeking currency targets in trade negotiations with Japan.
The Japan Feb tertiary index was unchanged m/m, weaker than expectations of +0.4% m/m.
The Japan Apr Jibun Bank manufacturing PMI rose +0.1 to 48.5. The Apr Jibun Bank services PMI rose +2.2 to 52.2
June gold (GCM25) Wednesday closed down -125.30 (-3.66%), and May silver (SIK25) closed up +0.642 (+1.96%). Precious metals prices Wednesday settled mixed, with gold sharply lower. Wednesday's stronger dollar sparked long liquidation pressures in precious metals. Also, comments from President Trump that he has no intention of firing Fed Chair Powell reduced safe-haven demand for precious metals. In addition, Wednesday's sharp rally in stocks curbed safe-haven demand for precious metals on optimism for a thaw in the US-China trade war after President Trump said he plans to be "very nice" to China in any talks and that tariffs will drop if the two countries can reach a trade deal.
Lower T-note yields Wednesday were supportive of precious metals. Also, geopolitical risks in the Middle East are boosting safe-haven demand for precious metals as the Israel-Hamas and the US-Houthi conflicts continue. Silver rallied Wednesday on stronger-than-expected April manufacturing PMI reports from the US, Japan, and the Eurozone, a positive factor for industrial metals demand. Also, a possible easing of US-China trade tensions supported economic growth prospects and demand for industrial metals.
