Dollar Slips on Tariff Fears and Fiscal Woes (26 - 30 May, 2025)

The dollar index held near 99.5 on Friday, its lowest in over two weeks, as Trump’s proposed 50% tariffs on EU goods and widening U.S. fiscal concerns pressured sentiment. The euro touched $1.137 before easing to $1.13, set for a weekly gain, supported by solid German data but capped by weak PMI and ECB rate cut bets. The yen rose to 143.6, gaining over 1% this week after core inflation hit a two-year high at 3.5%. The pound climbed above $1.347 on strong UK retail sales, improved confidence, and falling energy prices, though inflation at 3.5% kept BoE cut expectations in play.

Gold rose to $3,330 on Friday, set for a weekly gain as fiscal worries, credit risks, and Middle East tensions drove safe-haven demand. A softer dollar and Fed cut bets added support. Silver surged above $33, up 3% this week, helped by safe-haven interest and solar-linked industrial demand from China. Brent crude dipped toward $64, heading for a weekly loss amid rising supply risks, higher U.S. inventories, and OPEC+ output uncertainty.

It was a volatile week for bonds. U.S. 10-year Treasury yields, which had risen earlier in the week, retreated back to the 4.48% range as Trump’s statements fueled fiscal uncertainty and investor caution. Japanese 10-year yields climbed toward a 16-year high, reaching around 1.56%, driven by renewed rate hike expectations. Meanwhile, German 10-year yields ended the week flat at around 2.43%, despite stronger growth data.

Eurozone CPI

Annual inflation in the Euro Area was confirmed at 2.2% in April 2025, slightly above the ECB’s 2.0% target. Services contributed the most (+1.80 pp), followed by food, alcohol, and tobacco (+0.57 pp), non-energy industrial goods (+0.15 pp), and energy (-0.35 pp). Core inflation rose to 2.7%, up from 2.4% in March. Monthly CPI increased by 0.6%, matching the previous month.

RBA Interest Rate Decision (May)

The Reserve Bank of Australia lowered its cash rate by 25bps to 3.85%, the first cut since January, aligning with expectations. With inflation easing into the 2–3% target, risks are seen as more balanced, although uncertainty remains due to weaker global trade and rising U.S. tariffs. The RBA remains ready to act if external shocks affect domestic growth. GDP is expected to grow gradually, while unemployment holds at 4.1%. Future policy will be data-dependent.

UK CPI

UK annual inflation rose to 3.5% in April, the highest since January 2024, from 2.6% in March, exceeding the 3.3% forecast. The jump was driven by electricity (4.6%) and gas (12.2%) costs, due to the new Ofgem price cap. Transport, recreation, and food prices also contributed, while clothing and footwear prices fell by 0.4%, offering some relief.

Initial Jobless Claims

U.S. initial jobless claims fell by 2,000 to 227,000 for the week ending May 17, the lowest in four weeks and below expectations. Continued claims rose by 36,000 to 1.903 million, signaling some difficulty in finding jobs. Claims by federal employees rose to 595 amid government downsizing.

S&P Global Manufacturing PMI (May)

The U.S. manufacturing PMI rose to 52.3 in May, the highest in three months. Factory output returned to growth, new orders surged, and inventories posted a record increase. Delivery times lengthened, signaling active supply chains. However, employment declined again, and input and output prices saw their sharpest increases since late 2022.

S&P Global Services PMI (May)

The U.S. services PMI rose to 52.3 in May from 50.8, beating expectations. Domestic new orders grew, while foreign demand dropped sharply, hurt by tariffs and policy uncertainty. Businesses cut staff for the second time in four months. Input costs have risen the most since June 2023, driving the fastest output inflation in over two years.

German GDP

Germany’s economy expanded by 0.4% in Q1 2025, revised up from 0.2%, the strongest growth since Q3 2022. Household spending increased (0.5%), exports rose 3.2%, and imports gained 1.1%. Manufacturing, communications, and services saw notable growth. Year-on-year, GDP remained flat after a 0.2% decline in Q4.

Currencies

The DXY hovered around 99.5, its lowest in over two weeks, weighed by concerns over Trump’s proposed 50% tariffs on EU goods and a tax bill expected to expand the deficit. These developments fueled fears of aggressive trade policy and fiscal instability, pushing investors toward alternative currencies.

The euro touched a two-week high near 1.137 before retreating to 1.13. Germany’s upgraded GDP and a strong Ifo index supported the euro, but weak Eurozone PMI and expectations of an ECB rate cut in June limited gains.

The Japanese yen strengthened to around 143.6 per dollar, up over 1% for the week. Core inflation reached 3.5%, its highest in more than two years, reinforcing expectations for further tightening by the Bank of Japan.

The British pound rose above 1.347, nearing its highest level since February 2022, supported by April’s 1.2% rise in retail sales, improved consumer confidence, and a 7% energy price cap cut effective from July. Inflation remains at 3.5%, but markets anticipate potential Bank of England rate cuts later this year.

Commodities

Gold climbed to around $3,330 per ounce on Friday, rebounding from earlier losses and heading for a weekly gain. Safe-haven demand grew amid U.S. fiscal concerns and geopolitical risks. The dollar’s weakness, a $4 trillion tax bill, and Moody’s downgrade all supported gold’s rise. Geopolitical tensions, including potential Israeli strikes on Iran and stalled Russia-Ukraine talks, further lifted prices.

Silver rose above $33 per ounce, gaining 3% on the week. It was supported by safe-haven flows, strong industrial demand, and China’s rapid growth in solar capacity. Fed Governor Waller’s dovish comments also supported precious metals.

Brent crude fell toward $64 per barrel, set for its first weekly decline in three weeks. Market concerns centered around a possible OPEC+ supply increase of 411,000 bpd in July and rising U.S. inventories. Demand for storage hit pandemic-era highs. Traders monitored U.S.-Iran nuclear talks and the Middle East situation closely.

Equities

U.S. stock indices saw a week of correction. The Nasdaq and S&P 500 are down about 1.5%, while the Dow Jones dropped nearly 1.9%. Apple led losses, falling 4.55%. Nvidia and Amazon also posted declines near 1%. In contrast, Google and Netflix gained approximately 3% over the week.