Market Insights: USD Weakness, Political Uncertainty, and Global Yield Shifts

The US dollar has entered the week struggling to recover from last week’s sharp decline, with the DXY index falling below the 104.00 level. This move erases all gains the dollar had accumulated since Donald Trump’s election victory. The sell-off coincided with a shift in market sentiment following softer US economic data and renewed uncertainty around the administration’s economic policies. Over the weekend, President Trump acknowledged that the economy is in a “period of transition,” downplaying concerns over tariffs while insisting that any adjustments would be minor. However, the broader market remains sceptical about the impact of potential trade policies on growth and inflation.

DXY 15 Minutes 

Equity markets have followed a similar trajectory. The S&P 500 has erased its post-election gains, retreating to its 200-day moving average near 5,730. Investors are speculating whether the weakness in both economic indicators and risk assets could pressure Trump into scaling back his tariff plans. So far, the administration has shown limited concern, with only minor rollbacks on Canadian and Mexican tariffs implemented last week.

US Jobs Market Sends Mixed Signals

The latest nonfarm payrolls report revealed a 151,000 job increase in February, an improvement from January’s downwardly revised 125,000 figures. However, after factoring in revisions, net job growth fell short of expectations by 11,000. While employment trends remain solid—averaging 191,000 jobs per month over the last six months—recent data suggests a loss of momentum compared to the post-election hiring surge. Notably, the federal government shed 10,000 jobs in February, marking the sharpest decline since mid-2022, potentially reflecting the administration’s push to reduce public sector employment.

NFP Release 

Federal Reserve Chair Jerome Powell remains cautious but not overly alarmed by the latest economic developments. He reaffirmed that while uncertainties persist, the economy remains "in a good place," emphasizing that the Fed is not in a rush to adjust policy. Despite this stance, markets have priced in a more dovish outlook, with expectations now leaning toward a June rate cut and a total of 75 basis points in easing by year-end. This divergence between market pricing and Fed rhetoric has contributed to the dollar’s recent slide.

Global Yield Movements Weigh on the USD

Another major driver of recent USD weakness has been the sharp rise in yields outside the US. The 10-year Japanese Government Bond (JGB) yield climbed to a new year-to-date high of 1.58%, reflecting growing expectations that the Bank of Japan (BoJ) will tighten policy further. January’s labour cash earnings report showed a 3.0% rise in base salaries, reinforcing speculation that the BoJ could raise rates as early as June or July, with some pricing in a smaller hike even in May. If this trajectory continues, Japanese rates could climb toward 1.00% by year-end, further narrowing the yield differential with the US and pressuring USD/JPY lower.

Meanwhile, German bond yields also saw a significant jump last week, with 10-year Bund yields rising 40 basis points to 2.84%, approaching their October 2023 highs. Markets reacted strongly to expectations that Friedrich Merz, the incoming German Chancellor, will pursue expansionary fiscal policies. Plans for increased defence and infrastructure spending have pushed up government borrowing costs while simultaneously providing a tailwind for European assets, strengthening the euro in the process.

Markets will closely watch upcoming macroeconomic releases, including the Sentix Investor Confidence Index in the Eurozone and US Consumer Inflation Expectations. Additionally, remarks from key policymakers such as Bundesbank President Joachim Nagel could influence rate expectations in Europe. In Japan, GDP data and household spending figures could further shape market views on the BoJ’s policy trajectory.

With the USD facing headwinds from softening economic data, shifting Fed expectations, and rising global yields, the next few weeks will be critical in determining whether the dollar finds stability or extends its decline.

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