Dollar Slumps to a 6-Month Low as US Tariffs Spark Trade War Fears

Rich Asplund Barchart Thu Apr 3, 9:42AM CDT
US dollar background by Iluhanos via iStock

The dollar index (DXY00) today is down sharply by -2.19% at a 6-month low. The dollar is plummeting today because of concerns that President Trump's sweeping new reciprocal tariffs will start a trade war that will derail the economy and force the Fed to cut interest rates.  Also, today's plunge on the 10-year T-note yield to a 5-1/2 month low has weakened the dollar's interest rate differentials.  In addition, the dollar may face a confidence crisis if President Trump's tariffs prompt investors to dump US assets.  The dollar extended its losses today after the US Mar ISM services index fell more than expected to a 9-month low.

US weekly initial unemployment claims unexpectedly fell -6,000 to a 7-week low of 219,000, showing a stronger labor market than expectations of an increase to 225,000. However, continuing claims rose +56,000 to a 3-1/3 year high of 1.903 million, above expectations of 1.870 million, showing it has become more difficult for out-of-work people to reenter the workforce.

The US Feb trade deficit eased to -$122.7 billion from -$130.7 billion in Jan, narrower than expectations of -$123.5 billion.

The US Mar ISM services index fell -2.7 to a 9-month low of 50.8, weaker than expectations of 52.9.

Market attention this week will include reaction to President Trump's new reciprocal tariffs. On Friday, March nonfarm payrolls are expected to increase by +138,000, and the March unemployment rate is expected to be unchanged at 4.1%.  Also, March average hourly earnings are expected to be +0.3% m/m and +4.0% y/y, unchanged from February.  Finally, on Friday, Fed Chair Powell is scheduled to speak to the Society for Advancing Business Editing and Writing Conference on the economic outlook.

The markets are discounting the chances at 34% for a -25 bp rate cut after the May 6-7 FOMC meeting.

EUR/USD (^EURUSD) today is up sharply by +2.26% at a 6-month high. The plunge in the dollar today is boosting the euro.  The euro also garnered support from today's economic news that showed an upward revision to the Eurozone Mar S&P composite PMI to a 7-month high and the increase in Eurozone Feb producer prices to their highest in almost 2 years, hawkish factors for ECB policy.

The Eurozone Mar S&P composite PMI was revised upward by +0.5 to a 7-month high of 50.9 from the previously reported 50.4.

The Eurozone Feb PPI rose +3.0% y/y, right on expectations and the fastest pace of increase in almost 2 years.

The account of the ECB's March 6 meeting stated that policymakers are considering both a rate cut and a pause possible for their April meeting, depending on incoming data.

Swaps are discounting the chances at 72% for a -25 bp rate cut by the ECB at the April 17 policy meeting.

USD/JPY (^USDJPY) today is down sharply by -2.38%.  The yen soared to a 6-month high against the dollar today after President Trump's new reciprocal tariffs hammered global equity markets and fueled safe-haven demand for the yen.  Also, today's upward revision to the Japan Mar Jibun Bank Mar services PMI supports the yen.  In addition, today's plunge in T-note yields is also bullish for the yen after the 10-year T-note yield sank to a 5-1/2 month low.

The Japan Mar Jibun Bank Mar services PMI was revised upward by +0.5 to 50.0 from the previously reported 49.5.

June gold (GCM25) today is down -28.10 (-0.89%), and May silver (SIK25) is down -2.175 (-6.28%).  Precious metals today are plunging, with gold falling to a 1-week low and silver dropping to a 1-month low.  President Trump's new reciprocal tariffs are hammering stock and commodity markets today, prompting investors to liquidate their profitable long gold and silver positions to raise cash to offset losses in other markets.  Also, falling inflation expectations are bearish for gold as they curb demand for gold as an inflation hedge after the US 10-year breakeven inflation rate fell to a 3-week low today.  Silver prices are also plunging today due to concern that US tariffs will spark a global trade war that will derail the economy and demand for industrial metals. 

Today's plunge in the dollar to a 6-month low is bullish for precious metals.  Also, trade war concerns continue to fuel safe-haven demand for precious metals after President Trump widened the scope of his tariffs.  In addition, 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. Finally, today's selloff in global equity markets has boosted some safe-haven demand for precious 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.