The dollar index (DXY00) Thursday fell by -1.84% and posted a 6-1/4 month low. The dollar fell sharply on Thursday because of concerns that the escalation of the US-China trade war would derail the economy and lead to stagflation. The US raised total tariffs on China Wednesday to 145% from 104% after China retaliated and imposed 84% tariffs on US goods. The dollar is also facing a confidence crisis as the US renegotiates its relationships with its trading partners, diminishing its reserve-currency status and prompting some foreign investors to liquidate their dollar assets. The dollar extended its losses Thursday after US March consumer prices rose less than expected, a dovish factor for Fed policy.
US weekly initial unemployment claims rose +4,000 to 223,000, right on expectations. Weekly continuing claims fell -43,000 to 1.850 million, showing a stronger labor market than expectations of 1.886 million.
US Mar CPI rose +2.4% y/y, weaker than expectations of +2.5% y/y and the smallest increase in 6 months. Mar CPI ex-food and energy rose +2.8% y/y, weaker than expectations of +3.0% y/y and the smallest increase in 4 years.
Kansas City Fed President Schmid said he would “prioritize reining in inflation” if the Fed is forced to balance its price stability goal against its mandate for full employment.
Dallas Fed President Logan said, “To sustainably achieve both of our dual-mandate goals, it will be important to keep any tariff-related price increases from fostering more persistent inflation.”
The markets are discounting the chances at 32% for a -25 bp rate cut after the May 6-7 FOMC meeting, down from a 30% chance last week.
EUR/USD (^EURUSD) Thursday rose by +1.98% and posted a 1-3/4 year high. The euro rallied sharply Thursday due to a plunge in the dollar. The euro also garnered support from President Trump’s actions to pause reciprocal tariffs, which may keep the Eurozone economy from falling into recession and reduce expectations on how much the ECB needs to keep easing monetary policy.
Swaps are discounting the chances at 90% for a -25 bp rate cut by the ECB at the April 17 policy meeting.
USD/JPY (^USDJPY) Thursday fell sharply by -1.89%. The yen rallied on Thursday and is just below Wednesday’s 6-1/4 month high against the dollar. The yen surged Thursday after Japanese producer prices rose more than expected in March, a hawkish factor for BOJ policy. Also, demand for the yen as a safe haven has increased due to the escalation of the US-China trade war.
Japan’s Mar PPI rose +0.4% m/m and +4.2% y/y, stronger than expectations of +0.2% m/m and +3.9% y/y.
June gold (GCM25) Thursday closed up +98.10 (+3.19%), and May silver (SIK25) closed up +0.344 (+1.13%). Precious metals rallied on Thursday, with gold settling sharply higher after the dollar index slumped to a 6-1/4 month low. Also, Thursday’s sell-off in stocks sparked safe-haven demand for precious metals. The escalation of the US-China trade rift has also boosted safe-haven demand for precious metals. In addition, geopolitical risks in the Middle East are boosting safe-haven demand for precious metals after the Israel-Hamas ceasefire broke down and as the US threatened more strikes on Yemen’s Houthi rebels. Fund buying of gold supports prices after long gold positions in ETFs rose to a 1-1/2 year high Wednesday. Gains in silver prices are limited by concern that an escalation of the trade war could derail the global economy and the demand for industrial metals.
