Dollar falls on tariff woes, PCE inflation in focus

US PCE inflation enters the spotlight amid tariff uncertainty

The US dollar slid against most of its peers on Thursday, as investors remain concerned about the impact of US President Trump’s tariffs on economic growth.

Although reports over the weekend suggested that Trump will adopt a softer and more flexible stance than previously anticipated on April 2, when the reciprocal tariffs are scheduled to take effect, the US President himself said on Wednesday that he is planning to proceed with a 25% levy on imported cards and light trucks on April 3. Duties on auto parts will take effect on May 3.

Boston Fed President Collins and Richmond President Barkin also expressed concerns about Trump’s plans. Collins said that tariffs will drive up US inflation, but it is unclear how persistent pressures will be. Barkin noted that companies may have to face the dilemma of how much of the cost burden they will pass on to the consumer. They must compete, and thus, they may try to limit price hikes by shredding workers.

This corroborates the notion that the Fed will have a difficult job to do in setting monetary policy in the months to come. According to Fed funds futures, investors are pencilling in 65bps worth of rate cuts by the end of the year, assigning a 72% chance that the next quarter-point reduction will be delivered in June.

Today, dollar traders are likely to lock their gaze on the core PCE price index for March, which is the Fed’s favourite inflation gauge. Although consumer and producer inflation data for the month revealed some cooling, the components that are also included in the PCE calculation, accelerated in March. Therefore, this poses some upside risks to today’s prints, which if materialized may allow the US dollar to gain somewhat as investors scale back their Fed rate cut bets.

Hot Tokyo CPI inflation keeps BoJ hike bets elevated

Flying to Japan, the Summary of Opinions from the latest Bank of Japan decision revealed that policymakers were divided over how soon they should raise interest rates again. The hawks warned of rising inflation, while several other members suggested that the pay hikes offered by big firms in this year’s wage talks are opening the door to further hikes. However, there were some members who appeared more focused on the increasing risks to the global and domestic economies from Trump’s tariff policies.

The summary revealed that the BoJ is also facing a dilemma on how to proceed with monetary policy, but the acceleration in the Tokyo CPI numbers is keeping expectations about the next quarter-point increase well anchored. According to Japan’s overnight index swaps (OIS), there is a 27% probability that the next hike will occur in May, with that percentage climbing above 50% in June.

Stocks slide, gold flies to new records as risk aversion deepens

On Wall Street, all three of its major indices slipped as investors remain fearful about Trump’s tariff policies. Following the announcement about auto tariffs, the General Motors stock tumbled over 7%, while Ford slid 3.9%. Car parts manufacturers Aptiv and BorgWarner suffered as well. Tesla on the other hand rose fractionally, perhaps as investors are expecting the EV firm to be hurt less because of its largely domestic production. With China, Canada, Mexico and Europe all preparing for retaliation, the risks surrounding the US equity market may still be tilted to the downside.

An official beginning of a new trade war could hurt risk appetite even more, which may not only translate into lower stock prices, but into further advances in gold as well. Gold has been the ultimate safe-haven asset the last few years, rebounding strongly following Trump’s latest tariff announcement and hitting a fresh record high today.