The dollar index (DXY) wrapped up Thursday with minimal fluctuations, hovering just above the previous day’s close by gaining 0.01%. The U.S. dollar experienced a boost due to renewed optimism surrounding trade discussions, fueled by President Trump’s assertion that “significant progress” was made by U.S. negotiators during talks with Japanese officials. There is also a growing expectation that a trade agreement will soon be reached with the European Union. The dollar’s ascent was further supported by a surprising drop in weekly jobless claims, which fell to the lowest level in two months, suggesting a robust labor market. New York Fed President John Williams reinforced this sentiment by declaring the U.S. economy to be in sound condition.
However, dollar gains were tempered by a larger-than-anticipated decline in March housing starts and a poor showing in the April Philadelphia Fed business outlook survey, which dropped to a two-year low. Additionally, economic stability in the stock market lessened the dollar’s liquidity demand.
In related economic news, initial weekly unemployment claims in the U.S. took an unexpected dip, decreasing by 9,000 to a two-month low of 215,000, when analysts had anticipated a rise to 225,000.
In terms of construction, March housing starts fell by 11.4% month-over-month to 1.324 million units, significantly short of forecasts that called for a figure of 1.420 million. Conversely, building permits issued in March showed a surprising increase of 1.6% month-over-month to 1.482 million, outperforming expectations of a drop to 1.450 million.
The Philadelphia Fed’s business outlook index for April plummeted by 38.9 points, ending at -26.4, well below the anticipated reading of 2.2. Reflecting on the economy’s health, Williams indicated that he sees no immediate need for adjustments to the federal funds rate, reinforcing a stable outlook for monetary policy. As a result, markets are currently pricing in an 11% probability of a 25-basis point rate cut following the Federal Open Market Committee’s meeting on May 6-7, a downturn from the 30% chance calculated the week prior.
Turning to the euro, the EUR/USD pair fell by 0.22% on Thursday, as the euro lost ground after the European Central Bank (ECB) executed a 25-basis point rate cut. The central bank’s communication omitted the term “restrictive” concerning monetary policy. Easing inflationary pressures across the Eurozone, particularly highlighting that German producer prices in March experienced their steepest decline in five months, contributed to this dovish sentiment. The euro’s losses were exacerbated by remarks from ECB President Christine Lagarde, who noted heightened downside risks to economic growth.
Specifically, the German producer price index (PPI) dropped by 0.2% year-over-year, marking a sharp contrast to expectations of a 0.4% year-over-year increase. Following the ECB’s decision to lower the deposit facility rate to 2.25% from 2.50%, Lagarde emphasized the deteriorating growth outlook primarily as a result of escalating trade tensions. Market forecasts now assign a 92% likelihood to another 25-basis point reduction at the ECB’s policy meeting scheduled for June 5.
On the currency front, the USD/JPY pair saw a 0.36% rise, as the yen declined from a six-and-a-half-month high against the dollar. This retreat is linked to decreased demand for safe-haven assets after President Trump announced satisfactory advancements in trade negotiations with Japan. Disappointing trade data from Japan and the chief trade negotiator’s comment that currency valuation was not on the agenda also added pressure to the yen.
Bank of Japan (BOJ) Governor Kazuo Ueda hinted at a pause in future interest rate increases, suggesting that they would evaluate economic conditions and inflation cautiously due to uncertain factors such as global tariff measures.
In commodities, June gold settled down by $18.00, or 0.54%, while May silver declined by $0.510, or 1.55%. Precious metals closed the day with moderate losses as bullion prices eased from recent highs amid waning demand for safe-haven assets, given positive trade updates. The dollar’s firm stance also exerted downward pressure on metal prices.
However, losses were somewhat moderated after the ECB’s rate cut, signaling potential for further monetary easing, while ongoing geopolitical tensions in the Middle East and the deteriorating U.S.-China trade relations maintain a backdrop of uncertainty that could support safe-haven asset demand. Fund engagement in gold has notably increased, leading to a significant uptick in long positions in exchange-traded funds (ETFs) for gold.
Overall, developments in trade negotiations, central bank policies, and economic indicators continue to shape market dynamics and investor sentiment.
