It’s early days, but we are on the lookout for any signs of a loss of confidence in the dollar. Could gold’s ongoing rally be telling us something? And are there any signs that foreigners are starting to leave the US Treasury market? In theory, today should be a mildly positive day for the dollar if US core PCE inflation stays sticky, but pricing has been soft
The dollar’s performance remains under scrutiny as markets assess several critical factors:
- Interest Rate Differentials: The dollar previously strengthened due to the Fed’s tight monetary policy, but uncertainty around US economic policies has left traders searching for new market narratives.
- FX Reserve Managers: With nearly $13 trillion in global reserves held in dollars, any shift away from USD allocations could impact its dominance. IMF data (due Monday) will provide updates on reserve composition.
- Gold’s Rally: The sustained rise in gold prices may signal declining confidence in the dollar as a safe haven.
- Foreign Treasury Holdings: Weekly Fed data on foreign custody of US Treasuries will be closely monitored for signs of reduced demand.
- Today’s Core PCE Inflation: A sticky reading (expected 0.3%-0.4% MoM) could reinforce expectations of delayed Fed rate cuts, potentially supporting the dollar. However, recent price action has been surprisingly weak.
- DXY Levels: A move toward 104.70-104.90 is possible if inflation surprises, but broader dollar sentiment remains cautious ahead of potential new US tariffs.
EUR: Holding Up Despite Tariff Risks
The euro showed resilience despite US auto tariff threats, with European automakers dipping only 1%. Some key observations:
- FX Options Market: Demand for long-term euro call options is rising, suggesting bullish sentiment despite recent EUR/USD declines.
- Inflation Data: French and Spanish figures, along with the ECB’s inflation expectations survey, could influence rate cut pricing (currently 19bp priced for April).
- EUR/USD Range: A test of 1.0730 is possible, but closing near 1.0830/50 would signal dollar weakness.
GBP: Boosted by Strong Retail Sales
UK retail sales rose 1% (volumes), following a 1.4% gain last month, reinforcing positive economic momentum.
- Sterling Reaction: GBP strengthened slightly, with 0.8320 as key support. A break below could target 0.8250.
- Next Week’s Focus: US-EU tariff developments may weigh on EUR/GBP.
AUD: Under Pressure as China Proxy
The Aussie dollar has lagged despite broader USD reassessment, with risks tilted lower:
- China Tariff Risks: Expected new US tariffs could push AUD/USD toward 0.6200.
- GBP/AUD Potential Rally: A move to 2.08/2.09 (2020 highs) is possible if AUD weakens further.
Summary: While US inflation data may offer short-term dollar support, broader concerns about tariffs, reserve diversification, and gold’s rally suggest underlying caution. The euro and pound show resilience, but the AUD remains vulnerable to China-linked risks.
1. Why is the dollar weakening despite strong US data?
Markets are watching for potential shifts away from USD in global reserves and foreign Treasury holdings, while gold’s rally suggests some investors are seeking alternatives.
2. How could today’s US inflation data affect the dollar?
If core PCE inflation stays high (0.3%-0.4% MoM), it may delay Fed rate cuts and temporarily boost the dollar – but broader sentiment remains cautious.
3. Why is the AUD underperforming other currencies?
As a proxy for China trade, the Aussie dollar faces pressure from expected new US tariffs, with AUD/USD potentially falling to 0.6200.
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