The dollar index rose 0.08% against a basket of major rivals today to 99.608, but remains 8% lower since the start of the year as investors seek alternatives to US assets, impacted by the trade wars.

US Economy Faces Pressure Despite Optimism 

Recent data showed US durable goods orders fell in April by the fastest pace in six months, as the trade war starts to impact the economy and corporations. 

ING Bank’s analysts wrote in a memo that more positive surprises in data are needed to restore confidence in US growth, with deficit worries persisting for the time being.

Additional Support from Trump’s Decisions 

The dollar was further boosted by US President Donald Trump’s decision to delay EU tariffs.

Reuters’ sources said European officials asked major corporations and CEOs in the EU to provide details on their US investments as Brussels intensifies trade talk with Washington.

Sterling, Aussie, and Kiwi 

Sterling rose $1.3506 and remained near a three-year high marked on Monday.

As for the Australian dollar, it hit $0.6445 against the greenback after data showed inflation held steady in April, underpinning hopes for a rate cut.

The New Zealand dollar rose 0.37% to $0.5971, after the central bank said it might approach the end of the policy easing cycle after an expected 0.25% rate cut.

Does Reduction of the Trade Deficit Require Weakening the Dollar?

If the US is serious about reducing its significant trade deficit, it might have to weaken the US dollar considerably, but history shows that something like that is highly unlikely. 

Reducing the trade deficit is a major target for President Trump, as he views the deficit as a result of decades of other countries’ preying on US wealth.

Dollar Moving in Desired Path 

If the Trump’s administration indeed intends to weaken the dollar, it’s moving in the right path, as the dollar is 10% weaker this year amid growing concerns about US fiscal policies and the end of “American Exceptionalism” as some investors view it. 

However, it’s worth noting that the dollar fell 15% during Trump’s first term and it didn't impact the trade deficit, which remained between 2.5% and 3.5%.

History’s Burden: Could the Deficit be Squashed without Recession?

Reducing the US trade deficit is a huge challenge, and outright eliminating it without a recession would be a historic task.

The US has sustained a chronic trade deficit for half a century due to increasing consumer demand on imported products.

The only exception was in the third quarter of 1980, when the US marked a slight trade deficit at 0.2% of GDP, with similar small quarterly surpluses in 1982, 1991 and 1992, mostly due to a sharp economic slowdown or a recession that tanked imports.

Dollar’s Role in Balancing Trade

The dollar played a pivotal role in reducing the deficit only once, during 1985-1987, when the dollar tumbled 50% following the Plaza agreement that aimed to weaken it after a sharp increase in the early eighties, and indeed, the deficit plunged by the early nineties. 

However, it doesn’t mean that even sharp decline by the dollar leads to deficit reduction, with the greenback falling by 40% between 2002 and 2008, but the deficit kept rising to a record of 6% of GDP in 2005.

During the last 50 years, the dollar index sustained only four 20% drops, none of them led to an improvement in the trade balance.

Could the Deficit Really Disappear?

The US administration admits the dollar remains historically strong according to several measures, with the official pressure from Trump’s government mounting on the dollar value.

How much would the dollar need to fall to reduce the trade deficit amounting to $918 billion last week, about 3.1% of total GDP?

Some analysts believe that a 20-30% drop in dollar’s value could just be enough to bring the deficit to parity once more in upcoming years, but such a step is historically very difficult without a recession.

Gold prices rose on Wednesday in European trade, resuming gains after a two-day hiatus and heading towards two-week highs once more as buying gains momentum around the $3300 barrier.

Gains are curbed however by a strong dollar following upbeat US data and ahead of the Federal Reserve’s meeting minutes. 

Prices

Gold prices rose 0.7% today to $3323 an ounce, with a session-high at $3291.

On Tuesday, gold lost 1.25%, the second loss in a row on profit-taking away from a two-week high at $3365.

US Dollar

The dollar index rose 0.35% on Wednesday, extending gains for the second session against a basket of major rivals.

Recent data showed the CB consumer sentiment index rallying to 98 in May, easily beating estimates of 87.1.

US Rates

According to the Fedwatch tool, the odds of a June 0.25% interest rate cut by the Federal Reserve stood at just 6%.

The odds of a July rate cut stood at 25%.

Markets now expect 50 basis points of total rate cuts by the end of the year, starting October.

Now investors await the Federal Reserve’s meeting minutes later today, expected to provide fresh clues on the future path of US interest rates.

The Fed maintained interest rates unchanged at below 4.5% for the third meeting in a row, and warned against increasing risks of inflation and unemployment, with economic uncertainty mounting due to Trump’s tariffs.

Fed Chair Jerome Powell said back then following the policy meeting that the Fed isn’t in a hurry to cut rates.

SPDR

Gold holdings at the SPDR Gold Trust remained unchanged yesterday at 922.46 tons.

The euro fell in European trade on Wednesday against a basket of major rivals, extending losses for the second straight session against the US dollar and backing off a four-week high on profit-taking. 

Hot inflation data and bullish remarks from ECB officials led to divisions among policymakers on the rate decision in June, with investors awaiting German and Spanish inflation data this week to gather more clues. 

Recent US data showed consumer confidence beat estimates in May, indicating that concerns about US recession have diminished.

The Price

The EUR/USD price fell 0.25% today to $1.1300, with a session-high at $1.1345.

The euro fell 0.5% on Tuesday against the dollar, on track for the first loss in three days away from a four-week high at $1.1419.

European Rates

Recent eurozone data showed inflation rose past estimates in April, renewing pressures on ECB policymakers. 

ECB President Christine Lagarde said the euro could be a practical alternative to the dollar if governments managed to bolster the financial and security structures in the EU.

Now markets estimate a less than 50% likelihood for a 0.25% ECB rate cut in June.

US Dollar

The dollar index rose 0.3% on Wednesday, extending gains for the second session against a basket of major rivals.

It comes as US-EU trade tensions receded with Trump granting the EU another chance for reaching a trade deal before July 9, backing off his 50% tariff threat for EU goods.

Recent data showed the CB consumer sentiment index rallying to 98 in May, easily beating estimates of 87.1.

Now investors await the Federal Reserve’s meeting minutes later today, expected to provide fresh clues on the future path of US interest rates.

The New Zealand dollar fell in Asian trade on Wednesday against a basket of major rivals, extending losses for the second straight session against the US dollar under pressure from the widening interest rate gap between the US and New Zealand.

The Reserve Bank of Australia cut interest rates to three-year lows and warned against the impact of US tariffs, and hinted at a slightly deeper than expected policy easing cycle. 

The Price

The NZD/USD price fell 0.4% today to $0.5924, with a session-high at $0.5968.

The New Zealand dollar closed down 0.9% on Tuesday against the dollar on profit-taking away from a six-month peak at 60.32 cents.

The kiwi was also hurt after strong US consumer confidence data for May.

RBNZ

The Reserve Bank of New Zealand cut interest rates by 25 basis points to 3.25% to April 2022 lows, the sixth such rate cut in a row, and matching expectations.

It wasn’t a unanimous vote, with a single member out of five voting in favor of maintaining rates unchanged.

The central bank cut interest rates by 225 basis points since August 2024 as lower inflation gave policymakers leeway to ease monetary policies to face the impact of US tariffs head on. 

The RBNZ said inflation remains within target range, and the bank is in a good position to respond to local and international developments and maintain stable prices in the medium term.

The bank warned that increasing uncertainty about global policies will negatively impact business investments and consumption in New Zealand. 

The bank expects interest rates to reach 2.92% in the fourth quarter of 2025, and 2.85% in the first quarter of 2026.

New Zealand Rates

Following the central bank’s meeting, the odds of a 0.25% RBNZ rate cut in July fell below 50%.

Interest rate futures estimates final New Zealand rates at 3% by the end of the year, up from 2.75% in previous forecasts.

Rate Gap

The current US-New Zealand interest rate gap stands at 125 basis points, favoring the greenback against its New Zealand counterpart.