Gold prices struggled to maintain momentum Wednesday despite the U.S. dollar falling to a four-month low, breaking the precious metal's pattern of gains seen earlier this week amid escalating global trade tensions.
The U.S. dollar has experienced a virtual freefall over the past three trading sessions. The dollar index opened Monday at 107.34 before declining 0.95% to close at 106.48. Tuesday brought another significant drop of 0.91%, taking the index to 105.51. Wednesday saw the largest percentage decline of the week at 1.18%, pushing the index down to 104.26.
While gold capitalized on dollar weakness during the first two trading days of the week with solid gains of 1.28% on Monday and 0.83% on Tuesday, the precious metal faltered on Wednesday. April gold futures reached an intraday high of $2,941.30 but failed to hold those levels, settling at $2,926 after factoring today’s gain of $5.40 as of 5:05 PM EST. Despite today's pause, market sentiment for gold remains bullish, with potential support coming from trade war escalation and continued central bank bullion purchases.
The dollar's weakness and gold's strength on Monday and Tuesday were directly attributed to President Trump's threats to impose significant tariffs on America's largest trading partners. These threats materialized when a 25% import tariff on goods from Mexico and Canada took effect at midnight Tuesday, alongside a doubled levy of 20% on Chinese imports.
This aggressive trade policy has officially marked the beginning of a trade war with the United States' largest trading partners. Economic analysts expect these measures to slow global growth while raising inflation within the United States, potentially delaying anticipated interest-rate cuts from the Federal Reserve. Canada and China have already implemented countervailing tariffs, with Mexico expected to announce its response on Sunday.
In an address to Congress on Tuesday night, the President indicated that additional punitive measures would follow on April 2, including "reciprocal tariffs" and non-tariff actions aimed at addressing years of trade imbalances.
Both gold and the dollar reacted Wednesday to the ADP private-sector employment report, which revealed a dramatic drop in hiring last month. Only 77,000 new jobs were added, down significantly from January's 186,000 and well below FactSet's consensus estimate of 142,500.
"The ADP report is the latest signal the U.S. economy is sputtering," according to MT Newswires. "The Federal Reserve Bank of Atlanta's GDPNow forecast expects the U.S. economy to contract by 2.8% in the first quarter."
If the U.S. economy continues to contract while inflation rises due to trade tensions, it could lead to stagflation – a condition that typically provides strong support for gold prices, despite today's momentary weakness in the face of a falling dollar.
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