Dollar Weakens as SCOTUS Rebuffs President Trump’s Tariffs

The dollar index (DXY00) fell from a 4-week high on Friday and finished down by -0.13%.  Weaker-than-expected US economic news knocked the dollar lower on Friday.  US Q4 GDP, the Feb S&P manufacturing PMI, and the University of Michigan US Feb consumer sentiment index all were weaker than expected and weighed on the dollar.

The dollar fell to its low on Friday after the Supreme Court struck down President Trump’s global tariffs, as the removal of the tariff revenue will boost the US budget deficit. Losses in the dollar are limited after the Dec core PCE price index, the Fed’s preferred inflation gauge, rose more than expected, a hawkish factor for Fed policy.  Also, hawkish comments on Friday from Atlanta Fed President Raphael Bostic supported the dollar, as he said it’s prudent to keep interest rates mildly restrictive. 

US Q4 GDP rose +1.4% (q/q annualized), weaker than expectations of +2.8%.  The Q4 core PCE price index rose +2.7%, stronger than expectations of +2.6%.

US Dec personal spending rose +0.4% m/m, stronger than expectations of +0.3% m/m.  Dec personal income rose +0.3% m/m, right on expectations.

The US Dec core PCE price index (the Fed’s preferred inflation gauge) rose +0.4% m/m and +3.0% y/y, stronger than expectations of +0.3% m/m and +2.9% y/y.

The US Feb S&P manufacturing PMI fell -1.2 to 51.2, weaker than expectations of no change at 52.4.

US Dec new home sales fell by -1.7% to 645,000, better than expectations of 730,000. 

The University of Michigan US Feb consumer sentiment index was revised lower by -0.7 to 56.6, weaker than expectations of no change at 57.3.

The University of Michigan US Feb 1-year inflation expectations were revised lower to a 13-month low of 3.4% from the previously reported 3.5%.  The Feb 5-10 year inflation expectations were revised lower to 3.3% from the previously reported 3.4%.

Atlanta Fed President Raphael Bostic said it’s prudent to have interest rates mildly restrictive as he expects US growth in 2026 to put upward pressure on inflation.

The US Supreme Court struck down President Trump’s sweeping global tariffs, saying he exceeded his authority by invoking a federal-emergency powers law to impose his “reciprocal” tariffs as well as targeted import taxes on countries to address fentanyl trafficking. 

After the Supreme Court’s ruling, President Trump said he would impose a 10% global tariff under Section 122 of the Trade Act of 1974, over and above tariffs already being charged.  He declared all national security tariffs under Section 232 and existing Section 301 tariffs to be in full force and effect.  Section 122 tariffs last only 150 days, and Congress would need to approve any extension.  Section 301 tariffs require country-specific investigations that include hearings and an opportunity for input from companies or nations affected.

Swaps markets are discounting the odds at 5% for a -25 bp rate cut at the next policy meeting on March 17-18.

The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026. 

EUR/USD (^EURUSD) on Friday rose by +0.06%.  The euro posted modest gains on Friday amid the dollar’s weakness.  Also, Friday’s stronger-than-expected Eurozone Feb manufacturing PMI was supportive of the euro.  Gains in the euro were limited after German Jan producer prices fell more than expected, a dovish factor for ECB policy.

Eurozone Feb S&P manufacturing PMI rose +1.3 to 50.8, stronger than expectations of 50.0 and the fastest pace of expansion in 3.5 years.

German Jan PPI fell -3.0% y/y, weaker than expectations of -2.2% y/y and the steepest pace of decline in 1.75 years.

Swaps are discounting a 2% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.

USD/JPY (^USDJPY) on Friday rose by +0.03%.  The yen fell to a 1.5-week low against the dollar on Friday after Japan’s Jan consumer prices rose less than expected, a dovish factor for BOJ policy.  Also, higher T-note yields on Friday were bearish for the yen. 

Losses in the yen were limited after the dollar weakened when the US Supreme Court struck down President Trump’s global tariffs.  The yen also found support Friday after Japan’s Feb S&P manufacturing PMI rose at the strongest pace in three years.  Divergent central bank policies are also supportive of the yen, with the BOJ seen raising interest rates in the near term, while the Fed and ECB keep their rates steady or cut them. 

Japan’s Jan national CPI rose +1.5% y/y, weaker than expectations of +1.6% y/y and the smallest pace of increase in 3.75 years.  Jan national CPI ex-fresh food and energy rose +2.6% y/y, weaker than expectations of +2.7% y/y and the smallest pace of increase in 11 months.

The Japan Feb S&P manufacturing PMI rose +1.3 to 52.8, the strongest pace of expansion in three years.

The markets are discounting a +12% chance of a BOJ rate hike at the next meeting on March 19.

April COMEX gold (GCJ26) on Friday closed up by +83.50 (+1.67%), and March COMEX silver (SIH26) closed up +4.709 (+6.07%). 

Gold and silver prices rallied sharply on Friday, posting 1-week highs.  Heightened geopolitical risks in the Middle East are boosting demand for precious metals as a safe haven.  Concerns about a possible conflict between the US and Iran are mounting after President Trump said 10 to 15 days were “pretty much” all he would allow for talks on a nuclear deal with Iran.  Gains in precious metals accelerated on Friday after the Supreme Court struck down President Trump’s global tariffs, as the removal of the tariff revenue will boost the US budget deficit, increasing demand for precious metals as a store of value.

Precious metals also have support amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela.  In addition, US political uncertainty, large US deficits, and uncertainty regarding government policies are prompting investors to cut holdings of dollar assets and shift into precious metals. 

Strong central bank demand for gold is also supportive of prices, following the recent news that bullion held in China’s PBOC reserves rose by +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves. 

Finally, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC’s December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.

Gold and silver plunged from record highs on January 30 when President Trump announced he had nominated Keven Warsh as the new Fed Chair, which fueled massive liquidation of long positions in precious metals.  Mr. Warsh is one of the more hawkish candidates for Fed Chair and is seen as less supportive of deep interest rate cuts.  Also, recent volatility in precious metals prices has prompted trading exchanges worldwide to raise margin requirements for gold and silver, leading to the liquidation of long positions. 

Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high on January 28.  Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 2.5-month low on February 2.