Possible US-China Tariff Talks Weigh on the Dollar

The dollar index (DXY00) Friday fell by -0.26%. The dollar was under pressure Friday on reduced safe-haven demand as news of possible US-China trade talks sparked a rally in stocks that boosted risk sentiment. The dollar also fell after US Apr average hourly earnings rose less than expected, a dovish factor for Fed policy. However, on the positive side for the dollar, T-note yields rose and strengthened the dollar’s interest rate differentials after US Mar factory orders posted their largest increase in 8 months, and Apr nonfarm payrolls rose more than expected, hawkish factors for Fed policy. US Apr nonfarm payrolls rose +177,000, stronger than expectations of +138,000, although Mar nonfarm payrolls were revised lower by 43,000 jobs to +185,000 from the previously reported +228,000. The Apr unemployment rate was unchanged at 4.2%, right on expectations.US Apr average hourly earnings rose +0.2% m/m and +3.8% y/y, slightly weaker than expectations of +0.3% m/m and +3.9% y/y.US Mar factory orders rose +4.3% m/m, the largest increase in 8 months.China’s Commerce Ministry is assessing the possibility of trade talks with the US. It said, “The US has recently sent messages to China through relevant parties, hoping to start trade talks with China, and we are currently evaluating this.”The markets are discounting the chances at 2% for a -25 bp rate cut after the May 6-7 FOMC meeting, down from a 30% chance last week.EUR/USD (^EURUSD) Friday rose by +0.16%. The euro garnered support Friday from a weaker dollar. Also, Friday’s Eurozone economic news supported the euro after upward revisions for the core CPI and S&P manufacturing PMI reports and an unchanged Eurozone unemployment rate at a record low. The Eurozone Apr core CPI was revised upward to 2.7% y/y from the previously reported 2.4% y/y.The Eurozone Apr S&P manufacturing PMI was revised upward by +0.3 to 49.0 from the previously reported 48.7.The Eurozone Mar unemployment rate was unchanged at a record low 6.2%.Swaps are discounting the chances at 95% for a -25 bp rate cut by the ECB at the June 5 policy meeting.USD/JPY (^USDJPY) Friday fell by -0.33%. The yen recovered from a 3-week low against the dollar Friday and posted moderate gains. Short covering emerged in the yen Friday after Japanese Finance Minister Kato said that Japan’s Treasury holdings, the most held by any nation, could be a card in its trade talks with the US. The selling of Japan’s Treasury holdings and repatriation back into yen assets would be a supportive factor for the yen. Gains in the yen were limited Friday after the Japan Mar jobless rate unexpectedly rose, a dovish factor for BOJ policy. Also, Friday’s rally in the Nikkei Stock Index to a 5-week high reduced safe-haven demand for the yen. In addition, higher T-note yields Friday are negative for the yen. The Japan Mar jobless rate unexpectedly rose +0.1 to 2.5%, showing a weaker labor market than expectations of no change at 2.4%. June gold (GCM25) Friday closed up +21.10 (+0.65%), and July silver (SIN25) closed down -0.210 (-0.65%). Precious metals prices on Friday settled mixed. Friday’s weaker dollar was supportive of precious metals. Also, geopolitical risks in the Middle East continue to support safe-haven demand for precious metals as the Israel-Hamas and the US-Houthi conflicts continue. Gains in precious metals were limited Friday by reduced safe-haven demand in hopes for a thaw in the US-China trade war after China’s Commerce Ministry said it is assessing the possibility of trade talks with the US. Also, Friday’s stronger-than-expected US Apr payrolls report boosted T-notes yields and may keep the Fed from cutting interest rates, a negative factor for precious metals. In addition, Friday’s stock rally has curbed safe-haven demand for precious metals. Silver prices garnered support Friday from positive global economic news. US Apr nonfarm payrolls rose more than expected, and US Mar factory orders posted their biggest increase in 8 months. Also, the Eurozone Apr S&P manufacturing PMI was revised upward, which supports industrial metals demand. 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.