The dollar index (DXY00) Thursday fell by -0.21% and posted a 4-month low. The dollar is under pressure because of the negative impact of US tariffs on the US economy. Also, the euro’s strength weighed on the dollar after EUR/USD Thursday jumped to a 4-month high when the ECB said interest rates are less restrictive. In addition, the yen rallied to a 5-month high against the dollar Thursday as Japan’s largest union demanded higher wages. The dollar added to its losses today after the US Jan trade deficit widened to a record.
Hawkish comments from Philadelphia Fed President Harker limited losses in the dollar when he warned that price pressures may threaten progress on inflation. Also, Thursday’s selloff in stocks boosted liquidity demand for the dollar.
US weekly initial unemployment claims fell -21,000 to 221,000, showing a stronger labor market than expectations of 233,000.
US Q4 nonfarm productivity was revised upward to 1.5% from the previously reported 1.2%. Q4 unit labor costs were revised lower to 2.2% from the previously reported 3.0%.
The US Jan trade deficit was a record -$131.4 billion, wider than expectations of -$128.8 billion.
Philadelphia Fed President Harker said he is concerned that the decline in price growth may not reach the Fed’s 2% target, citing “a lot of pressures building” that could prevent it from happening. He also said, “Business and consumer confidence is starting to wane, and that’s not a good sign.”
Market attention for the rest of this week will focus on Friday’s Feb nonfarm payroll report (expected to rise by +160,000) and the Feb unemployment rate (expected to remain unchanged at 4.0%). Also, Feb average hourly earnings are expected to be unchanged from Jan at +4.1% y/y. In addition, Fed Chair Powell on Friday gives the keynote speech on the economic outlook at Chicago Booth’s 2025 US Monetary Policy Forum.
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) Thursday rose by +0.08% and posted a 4-month high. Soaring Eurozone government bond yields are strengthening the euro’s interest rate differentials after the 10-year German bund yield rose to a 16-month high Thursday. The euro extended its gains after the ECB cut interest rates, as expected, but said interest rates were less restrictive, bolstering speculation the ECB may be close to ending its rate-cutting cycle.
Eurozone Jan retail sales unexpectedly fell -0.3% m/m, weaker than expectations of a +0.1% m/m increase.
The ECB, as expected, cut the deposit facility rate by 25 bp to 2.50% from 2.75% and said interest rates are “becoming meaningfully less restrictive.” The ECB cut its Eurozone 2025 GDP forecast to 0.9% from 1.1% and cut its 2025 inflation ex-food and energy forecast to 2.2% from 2.3%.
Swaps are discounting the chances at 77% for a -25 bp rate cut by the ECB at the April 17 policy meeting.
USD/JPY (^USDJPY) Thursday fell by -0.74%. The yen rallied to a 5-month high against the dollar Thursday after Japan’s largest labor union demanded the biggest wage increase since 1993, which may prompt the BOJ to keep raising interest rates. Soaring Japanese government bond yields are also strengthening the yen’s interest rate differentials after the 10-year JGB bond yield jumped to a 15-year high Thursday of 1.553%. The yen fell back from its best level Thursday after T-note yields rose, a bearish factor for the yen.
Japan’s biggest union group is demanding a 6.09% wage increase this year, the largest since 1993 and a hawkish development for BOJ policy.
April gold (GCJ25) Thursday closed up +0.60 (+0.02%), and May silver (SIK25) closed up +0.204 (+0.62%). Precious metals prices Thursday recovered from early losses and posted modest gains, with silver climbing to a 1-1/2 week high. Thursday’s fall in the dollar to a 4-month low is bullish for precious metals. Also, Thursday’s stock selloff boosted safe-haven demand for precious metals. In addition, Thursday’s action by the ECB to cut interest rates boosts demand for precious metals as a store of value. Finally, precious metals still have strong safe-haven demand after US tariffs went into effect Tuesday against Canada, China, and Mexico, and Canada and China retaliated with their tariffs on US goods. Fund buying supports gold prices as long gold positions in ETFs rose to a 15-month high Wednesday.
Precious metals Thursday initially moved lower on soaring global bond yields after the 10-year German bund yield climbed to a 16-month high and the 10-year Japan JGB bond yield jumped to a 15-year high. Also, Thursday’s hawkish post-ECB meeting statement weighed on precious metals when the ECB said interest rates are “becoming meaningfully less restrictive.” Silver prices are also under pressure because of the concern that US actions to impose tariffs will lead to a global trade war that undercuts economic growth and industrial metals demand.
