The dollar index (DXY00) Tuesday fell by -0.40%. The dollar was under pressure Tuesday because of concerns that a global trade war could derail the economy and force the Fed to cut interest rates. President Trump said he would boost tariffs on China by 50% if it doesn’t remove its 34% tariff on US goods by Wednesday, to which China replied it’s prepared to “fight to the end.” Also, the dollar is facing a confidence crisis as the US renegotiates its relationships with its trading partners, diminishing the dollar’s reserve-currency status and prompting some foreign investors to liquidate their dollar assets. Higher T-note yields Tuesday and hawkish comments from San Francisco Fed President Daly limited losses in the dollar.
Chicago Fed President Goolsbee said some business leaders expressed anxiety about the possibility that tariffs could send the economy back to the conditions of 2021 and 2022 when inflation was “raging out of control.”
San Francisco Fed President Daly said the Fed could take its time before making any adjustment to interest rates as it waits to see how trade policy changes play out.
The markets are discounting the chances at 52% for a -25 bp rate cut after the May 6-7 FOMC meeting.
EUR/USD (^EURUSD) Tuesday rose by +0.57%. The euro moved moderately higher on Tuesday due to the dollar’s weakness. However, gains in the euro were limited by dovish ECB comments. ECB Governing Council member Simkus said, “I still think the ECB should cut interest rates next week,” and ECB Governing Council member and Bundesbank President Nagel said the ECB is “well on track” to reach its inflation target this year.
ECB Governing Council member Simkus said, “I still think the ECB should cut rates this month, and then, with a lot more information in June, including more clarity on tariffs and other things, we can think about whether we should wait and see or cut again.”
Swaps are discounting the chances at 89% for a -25 bp rate cut by the ECB at the April 17 policy meeting.
USD/JPY (^USDJPY) Tuesday fell by -1.15%. The yen moved higher Tuesday on the dollar’s weakness. Also, comments late Monday from US Treasury Secretary Bessent boosted the yen when he said Japan is moving to the front of the line in countries seeking to roll back US reciprocal tariffs and will get “priority” in US tariff talks. In addition, concerns about escalation of the global trade war boosted safe-haven demand for the yen after President Trump said Tuesday that the US is going forward with 50% tariffs on China if it refuses to rescind tariffs it imposed on US goods by midnight.
Negative factors for the yen include Tuesday’s Japanese economic news that showed a weaker-than-expected Mar eco watchers outlook survey and the sharp rally in the Nikkei Stock Index, which reduced safe-haven demand for the yen.
The Japan Mar eco watchers outlook survey fell -1.4 to a 2-1/2 year low of 45.2, weaker than expectations of 46.1.
June gold (GCM25) Tuesday closed up +16.60 (+0.56%), and May silver (SIK25) closed up +0.082 (+0.28%). Precious metals Tuesday posted moderate gains. Tuesday’s weaker dollar was bullish for metals. Also, the escalation of the trade war has boosted safe-haven demand for precious metals after President Trump said he would boost tariffs on China by 50% if it doesn’t remove its 34% tariff on US goods by Wednesday, to which China replied it’s prepared to “fight to the end.” In addition, dovish comments from ECB Governing Council member Simkus supported precious metals when he said, “I still think the ECB should cut interest rates next week.” Finally, geopolitical risks in the Middle East are boosting safe-haven demand for precious metals as Israel continues airstrikes across Gaza, ending a two-month ceasefire with Hamas, and as the US continues to launch strikes on Yemen’s Houthi rebels.
Higher global bond yields on Tuesday were negative for precious metals. Also, hawkish comments from San Francisco Fed President Daly were bearish for precious metals when she said the Fed could take its time before making any adjustment to interest rates. In addition, 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.
