Tariffs Spark Economic Concerns and Undercut the Dollar

The dollar index (DXY00) Tuesday fell by -0.57% and posted a 4-3/4 month low. The dollar has been under pressure since last week when the US announced tariffs on Canada, China, and Mexico, fueling concerns that a trade war will erupt and derail the economy.  The dollar was undercut Tuesday when President Trump raised his tariff to 50% from 25% on US imports of steel and aluminum in retaliation for Ontario slapping a 25% export tariff on electricity sent to the US.

The dollar found some support Tuesday after the US JOLTS Jan job openings rose more than expected. Also, continued weakness in stocks has boosted the liquidity demand for the dollar.

US Jan JOLTS job openings rose +232,000 to 7.74 million, higher than expectations of unchanged at 7.60 million and indicating stronger-than-expected labor market news.

Market attention this week will focus on Wednesday’s Feb US CPI report, which is expected to ease slightly to +2.9% y/y from +3.0% y/y in Jan.  The Feb core CPI is expected to ease to +3.2% y/y from +3.3% y/y in Jan.  Also, US trade policies will be in focus, with 25% tariffs on US imports of steel and aluminum scheduled to take effect on Wednesday. On Thursday, the Feb final-demand PPI is expected to ease to +3.2% y/y from +3.5% y/y in Jan.  On Friday, the University of Michigan’s March consumer sentiment index is expected to fall -1.2 to 63.5.  Finally, the markets will also see if Congress can approve a spending bill to avert a government shutdown ahead of a March 15 deadline.

The markets are discounting the chances at 4% for a -25 bp rate cut at the next FOMC meeting on March 18-19.

EUR/USD (^EURUSD) Tuesday rose by +0.87% and posted a 5-month high. The dollar’s weakness on Tuesday was supportive of the euro.  The euro also rose Tuesday after the leader of Germany’s Green Party said they are ready to negotiate and reach an agreement in a dispute over defense spending with Germany’s prospective ruling coalition led by Chancellor-in-waiting Merz.

Swaps are discounting the chances at 50% for a -25 bp rate cut by the ECB at the April 17 policy meeting.

USD/JPY (^USDJPY) Tuesday rose by +0.31%.  The yen fell back from a 5-1/4 month high against the dollar today and posted moderate losses.  Tuesday’s weaker-than-expected Japanese economic news undercut the yen.  Also, higher T-note yields on Tuesday weighed on the yen. 

Japan Jan household spending rose +0.8% y/y, weaker than expectations of +3.7% y/y.

Japan’s Q4 GDP was revised lower to +2.2% (annualized q/q) from the previously reported +2.8%.

Japan Feb machine tool orders rose +3.5% y/y, the fifth consecutive monthly increase.

April gold (GCJ25) Tuesday closed up +21.50 (+0.74%), and May silver (SIK25) closed up +0.617 (+1.90%).  Precious metals prices Tuesday recovered from early losses and settled moderately higher. Tuesday’s slump in the dollar index to a 4-3/4 month low is bullish for metals prices.  Also, due to US tariffs and retaliation, precious metals have ongoing safe-haven demand.  Gains in precious metals accelerated Tuesday after President Trump ramped up tariffs to 50% on steel and aluminum coming into the US from Canada.

Higher global government bond yields on Tuesday were bearish for precious metals.  A bearish factor for silver prices was the downward revision to Japan’s Q4 GDP, a negative factor for industrial metals demand. Silver prices are also negatively affected by concerns that US tariff policies will spark a trade war that derails economic growth and curbs global 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.