The dollar index (DXY00) Tuesday fell by -1.06%. The dollar on Tuesday extended Monday’s losses to a 2-3/4 month low. The dollar fell on concern that US tariffs will spark a trade war that undercuts US economic growth. Also, Tuesday’s rally in EUR/USD to a 2-3/4 month high undercut the dollar. The dollar had some support for increased liquidity demand due to Tuesday’s slide in equity markets.
Hawkish comments from New York Fed President Williams were supportive for the dollar when he said that there’s still a lot of uncertainty about US tariff policy and what other countries will do in response, but they’ll “likely lead to somewhat higher prices this year.”
Market attention this week will focus on tonight’s address to a joint session of Congress by President Trump. On Wednesday, the Feb ISM services index will be released (expected -0.1 to 52.7). On Friday, Feb nonfarm payrolls are expected to rise by +160,000, and the Feb unemployment rate is expected to remain unchanged at 4.0%. Meanwhile, Feb average hourly earnings are expected to be unchanged from Jan at +4.1% y/y. Also on Friday, Fed Chair Powell gives the keynote speech on the economic outlook at Chicago Booth’s 2025 US Monetary Policy Forum.
The markets are discounting the chances at 7% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
EUR/USD (^EURUSD) Tuesday rose by +1.20%. The euro rallied to a 2-3/4 month high Tuesday after the EU said it would propose loans to increase defense spending in the region, bolstering expectations that more spending would be positive for the Eurozone economy. The euro was supported by Tuesday’s report that the Eurozone Jan unemployment rate remained at a record low. The euro raced to its high Tuesday afternoon after Germany announced the creation of a 500-billion-euro special defense fund and said it would reform its debt brake to allow for more defense outlays.
The Eurozone Jan unemployment rate was unchanged at a record low of 6.2%, showing a stronger labor market than expectations of 6.3%.
The European Union (EU) proposed extending 150 billion euros in loans to boost defense spending in the EU and activating a mechanism allowing countries to spend an additional 650 billion euros on defense over four years without triggering budgetary penalties.
Germany’s Bundesbank, in a report Tuesday, said the country should loosen constitutional borrowing limits to free up as much as 220 billion euros of fiscal space through 2030 to boost infrastructure and military spending and recommended a significantly higher ceiling of as much as 1.4% of GDP for structural net borrowing.
Swaps are discounting the chances at 99% for a -25 bp rate cut by the ECB at the March 6 policy meeting.
USD/JPY (^USDJPY) Tuesday fell by -0.13%. The yen on Tuesday added to Monday’s advance and climbed to a 4-3/4 month high against the dollar. US tariffs went into effect Tuesday on Canadian, Chinese, and Mexican goods, and Canada and China retaliated with their own tariffs on US goods, sparking concerns about escalating global trade tensions and boosting safe-haven demand for the yen. Higher Japanese government bond yields also supported the yen after the 10-year JGB bond yield rose to a 1-week high of 1.432%. In addition, today’s slump in the Nikkei Stock Index to a 5-1/2 month low boosted safe-haven demand for the yen.
However, the yen gave up most of its advance after T-note yields rebounded from early losses and moved higher. Also, Tuesday’s Japanese economic news was weaker than expected and bearish for the yen.
The Japan Feb consumer confidence index unexpectedly fell -0.2 to a 2-year low of 35.0, weaker than expectations of an increase to 35.3.
Japan’s Q4 capital spending unexpectedly fell -0.2% y/y, weaker than expectations of +5.0% y/y and the first decline since Q1 of 2021. Q4 capital spending ex-software rose +3.1% y/y, weaker than expectations of +4.7% y/y.
The Japan Jan jobless rate was unchanged at 2.5%, showing a weaker labor market than expectations of 2.4%.
April gold (GCJ25) Tuesday closed up +19.50 (+0.67%), and May silver (SIK25) closed up +0.071 (+0.22%). Precious metals prices on Tuesday posted moderate gains. Tuesday’s slide in the dollar index to a 2-3/4 month low was bullish for precious metals. Also, weakness in equity markets supported safe-haven demand for precious metals. In addition, escalating global trade tensions sparked safe-haven buying of precious metals after US tariffs went into effect today against Canada, China, and Mexico, and Canada and China retaliated with their tariffs on US goods. Finally, fund buying also supported gold prices as long gold positions in ETFs rose to a 14-1/2 month high Monday.
Hawkish comments from New York Fed President Willams were negative for precious metals when he said tariffs would likely spur inflation, which was hawkish for Fed policy. Gains in silver prices were limited because of concerns that worsening trade tensions would lead to slower global economic growth and weaker demand for industrial 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 in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
