Increased Demand for Risk Underpins Dollar as Trade War Tensions Ease

The U.S. Dollar traded mixed against a basket of major currencies on Monday before settling higher. The dollar posted gains against the Japanese Yen, New Zealand Dollar and Canadian Dollar, but lost ground versus the Euro, British Pound and Australian Dollar.

March U.S. Dollar Index futures settled at 90.041, up 0.135 or +0.15%.

The dollar was primarily underpinned by an easing of tensions over a possible trade-war in retaliation to last week’s announcement by President Trump of proposed 25-percent and 10-percent tariffs on imported steel and aluminum.

Early Monday, Trump may have opened the door for negotiations on tariffs when he sent out a series of tweets suggesting he remains flexible on the idea.

Trump’s tweets stated, “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.” Adding that “Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done.”

In other news, House Speaker Paul Ryan said he was “extremely worried” about Trump’s trade plan. Congressional leaders, meanwhile, will not rule out potential action if Trump decides to move forward with his tariff plan.

U.S. Economic News

Final Services PMI came in at 55.9, matching expectations. ISM Non-Manufacturing PMI was 59.5, better than the 58.9 estimate, but below last month’s 59.9 read.

Additionally, Federal Reserve Vice Chairman Randal Quarles said U.S. financial regulators are working quickly to make “material changes” to the Volcker Rule, one of Wall Street’s most hated post-crisis restrictions.

Gold

Gold prices rose to their highest level since February 27 early Monday before settling lower for the session. Investors bought gold early in the session as a protectionist measure against political uncertainty in Italy and on fears of a global trade war in reaction to President Trump’s announcement of tariffs on imported steels and aluminum.

The easing of tensions over Italy and the possibility of a trade war helped boost the dollar, driving down gold into the close. Increased demand for higher risk assets also pressured prices.

Crude Oil

U.S. West Texas intermediate and international-benchmark Brent crude oil closed higher on Monday after erasing earlier losses.

Prices fell early in the session in reaction to a report that predicted a major spike in U.S. oil output in the next five years.

The International Energy Agency (IEA) early Monday revised U.S. oil output growth up sharply, saying the country would be producing a total of nearly 17 million barrels per day in 2023, up from 13.2 million last year, eating into OPEC’s market share and moving closer to self-sufficiency.

Prices posted a rapid turnaround to close higher for the session after the same report forecast robust oil demand growth and concerns OPEC will not be able to increase its production capacity.

Natural Gas

Natural gas futures settled higher on weather concerns as another wave of cold temperatures swept through key demand areas in the Midwest and East Coast. Since the weather pattern is expected to be short-lived, gains were limited.

NatGasWeather.com predicts stronger than normal national heating demand, but they are also saying that it is not an exceptionally frigid system.