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Dollar Index Rises to New Highs Amid Trade Developments
On Monday, the dollar index (DXY) saw a significant increase, reaching a one-month peak, closing up by 1.48%. This surge was driven by an agreement between the United States and China to temporarily reduce tariffs on various imports from each other. The increase also coincided with a rise in the yield of the 10-year Treasury note, which reached a four-week high, consequently enhancing the appeal of the dollar due to favorable interest rate differentials. Additionally, the stock market’s upward trend and the easing of trade conflicts have diminished expectations of interest rate cuts from the Federal Reserve, further bolstering the dollar’s strength.
However, the dollar retreated slightly after comments from Fed Governor Kugler, who indicated that current tariff policies might lead to increased inflation and economic slowdown, despite the recent tariff reductions concerning China.
The United States and China agreed to lower tariffs temporarily for a three-month period, cutting U.S. tariffs on Chinese goods from 145% to 30%, while China reduced its tariffs from 125% to 10%. Treasury Secretary Bessent remarked that neither country aims to "decouple" economically and hinted that further dialogue could foster "purchasing agreements" by China.
On the foreign exchange front, the euro saw a sharp decline, hitting a one-month low and finishing down by 1.40%. The dollar’s rally significantly influenced the euro, pushing traders to liquidate long-held positions. The euro’s downturn was further compounded by comments from ECB Governing Council member Kazaks, who suggested that the economic data supports the possibility of another interest rate cut from the European Central Bank (ECB).
Market expectations now reflect an 83% probability of a 25 basis point rate cut by the ECB during its upcoming policy meeting.
In the currency pairing of USD/JPY, there was a notable increase of 2.01% as the yen weakened, reaching a five-week low against the dollar. This drop was attributed to decreased demand for safe-haven assets following the U.S.-China agreement on tariff reductions. Additionally, geopolitical tensions eased between India and Pakistan, and Ukraine’s President Zelenskiy announced plans to engage in direct talks with Russian President Putin, further lowering safe-haven demand for the yen. Economic data released on Monday also indicated that Japan’s April economic watchers outlook survey decreased more than anticipated, suggesting a bearish outlook for the yen.
In commodities, June gold futures experienced a significant decline, dropping $116.00 (3.47%), while July silver futures fell by $0.290 (0.88%). Precious metals faced downward pressure, settling at one-week lows as the dollar index surged. The easing of trade tensions fueled rallies in equity markets, which led to liquidations in precious metal positions after tariff reductions were announced. Furthermore, diminished geopolitical risks also impacted precious metals, stemming from the ceasefire agreement between India and Pakistan, coupled with Ukraine’s President planning negotiations with Russia.
Despite these pressures, silver prices demonstrated some resilience, supported by the positive outlook for industrial metals demand resulting from improved economic growth prospects due to easing trade frictions. However, ongoing conflicts in the Middle East, particularly the situation between Israel and Hamas, continued to maintain some measure of safe-haven demand for precious metals.
As the financial landscape evolves, market participants remain vigilant to any changes that could influence economic stability and currency valuation.
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