Dollar Surges to 5-Week High, Euro Plunges as Trade Deal Favors US

The dollar index (DXY00) marked a significant gain of +0.22% on Tuesday, posting its highest level in five weeks, while the euro sank by -0.28%, reaching a five-week low. This shift in currency values can be attributed to several key factors.

Stronger-than-expected US Economic Data Boosts Dollar

The dollar received continued support from Monday’s announcement of the trade deal between the EU and the US, which appears to favor the United States. Additionally, expectations for the Federal Reserve to maintain interest rates unchanged at its upcoming two-day meeting this week contribute to the increase in value. However, another significant development played a part in the dollar’s surge: the release of advanced goods trade deficit figures for June, which unexpectedly shrunk.

June Advance Goods Trade Deficit Surprises with Unexpected Drop

The US advance goods trade deficit contracted more than anticipated, dipping to -$86.0 billion compared to forecasts of an expansion to -$98.0 billion. This reduction in the deficit adds support for second-quarter GDP growth in the United States.

Other Economic Indicators Contribute to Strong Dollar

Another crucial indicator came from the US May S&P CoreLogic composite-20 home price index, which reported a year-over-year increase of +2.79%, although this figure was slightly under expectations at +2.91%. This level represents the smallest increment in 1.75 years.

On the other hand, the Conference Board’s July consumer confidence index displayed resiliency by rising to 97.2 from June’s level of 95.2. However, it is worth noting that these figures are less impactful when considering the dollar’s broader context.

The Dollar vs. Euro: Trade Deal Woes for the Eurozone

The euro found itself at a 5-week low as it fell by -0.28% on Tuesday. This downturn can be attributed to several factors related to the announced trade deal, with the US imposing tariffs amounting to 15% on various EU goods.

This move could potentially create challenges for the Eurozone economy due to increased costs stemming from these duties. The European Central Bank’s (ECB) inflation expectations also contributed to the euro’s weakness:

• In June, the ECB announced a easing of its one-year inflation forecast to +2.6%, down from May’s reading of +2.8%.
• Meanwhile, the ECB reported no changes in the three-year inflation projections for June.

Market Expectations: Rate Cuts and Dollar Price Effects

Markets are pricing in a 14% chance of a -25 bp rate cut by the European Central Bank at its next policy meeting set for September 11. As it stands now, T-note yields have decreased due to this dovish factor affecting Fed policy.

Other Market Developments: Yen and Precious Metals

Tuesday was a day of significant fluctuation in several markets. The yen experienced a rebound from hitting a one-week low against the dollar as concerns about US trade deals abated through their reduced impact on safe-haven demand for currencies traditionally considered "safe." This shift towards less stringent fiscal policies is expected to lead to more government spending, contributing to higher inflation projections.

August gold reached a price of +14.00 (+0.42%) with September silver also increasing to +0.065 (+0.17%). These precious metals displayed a sharp rise on Tuesday as a fall in T-note yields increased the value of these assets.

Precious metal prices received safe-haven demand, thanks to geopolitical issues such as conflicts in Ukraine and the Middle East. Fund buying supported precious metals with gold ETF holdings reaching a two-year high last Friday while silver saw its levels hit a three-year peak on Monday.