U.S. Dollar Plunges on Trade-War Concerns

The U.S. Dollar broke sharply against a basket of major currencies on Tuesday as investors reacted to a couple of key events. The selling pressure started early in the session after South Korea said it would hold its first summit with the North in more than a decade, reducing geopolitical tensions. This report made the U.S. Dollar a less-desirable asset.

March U.S. Dollar Index futures settled on Tuesday at 89.590, down 0.451 or -0.50%.

The weakness in the dollar extended later in the session after a key advocate for free trade in the White House announced his resignation, fanning fears President Trump would go ahead with tariffs and risk a trade war.

White House economic advisor Gary Cohn announced he was leaving his job amid turmoil with protectionist forces within the Trump Administration.

Also pressuring the dollar index was a stronger Euro. The single-currency rose to its highest level in two weeks on speculation the European Central Bank might drop its easing bias at next week’s policy meeting, though President Mario Draghi has shown little public urgency to do so recently.

U.S. Economic Reports

New orders for U.S.-made goods recorded their biggest decline in six months in January and business spending on equipment appeared to be slowing after stronger growth in 2017.

Factory goods orders fell 1.4 percent amid a broad decrease in demand, the Commerce Department said on Tuesday. That was the largest drop since July 2017 and followed five straight monthly increases. Factory order rose 1.8 percent in December. Traders were looking for a drop of -0.4%.

In other news, IBD/TIPP Economic Optimism came in below expectations at 55.6. Traders were looking for 58.2. The last report came in at 56.7.

Fed Speakers

In Fed news, Dallas Fed President Robert Kaplan said on Tuesday, the Federal Reserve should get started hiking interest rates and can decide as the year unfolds how many times to move.

“My base case…is three for this year,” Kaplan said in an interview on CNBC.

“I think we should get started sooner rather than later though, and we will see as the year unfolds whether the base case should stay at 3 or should be something more or something less,” Kaplan said.

“The reason I want to start raising the Fed funds rate is I think that will give us the best chance to extend the expansion for longer,” Kaplan said.

The Fed has never been able to just tap on the brakes and keep the economy growing when the unemployment rate falls below full employment, he said.

“The history of overshooting full employment in the United States and having a soft landing is not a long history,” he said.

Additionally, Federal Reserve Governor Lael Brainard on Tuesday said that a higher path of interest rates could become warranted if a variety of economic “tailwinds” give the economy forward thrust.

Continued gradual increases in the Federal funds rate are likely to remain appropriate, Brainard said, but the Fed needs to be flexible.

In her speech, Brainard sounded more concerned the Fed wasn’t moving fast enough, which was a departure from her normal voice of caution.

Crude Oil

U.S. West Texas Intermediate crude oil and international-benchmark Brent crude oil reversed earlier gains to finish lower for the session.

Crude oil drew support early Tuesday as the U.S. Dollar fell to its lowest level in more than a week against a basket of currencies on news from South Korea that North Korea was willing to hold talks with the United States on denuclearization, and would suspend nuclear tests during any discussions.

Prices retreated late in the session on the news that White House economic adviser Gary Cohn had resigned. This surprise event drove investors out of risky assets on concerns that Washington would go ahead with import tariffs and risk a trade war.

Gold

A weaker U.S. Dollar and uncertainty over the prospect of a trade war breaking out over proposed U.S. tariffs on steel and aluminum imports drove investors into the safe haven gold market on Tuesday.

The dollar was under pressure most of the session, first by the news of a summit between North and South Korea, and secondly after White House economic adviser abruptly resigned amid tension with the Trump Administration over the tariffs.

Some traders are saying that the uncertainty created by Trump is once again coming in to support gold. Stephen Innes, APAC trading head at OANDA said, “In the near-term, given the unpredictable nature of current market sentiment, investors will continue to buy gold on dips to hedge the growing tail risk from Trump’s controversial policies.”