Dollar Weakens on Dovish Fed Comments

The dollar index (DXY00) on Tuesday fell by -0.20%.  The dollar Tuesday fell back from a 4-1/2 month high and posted moderate losses.  Tuesday's strength in the euro sparked long liquidation in the dollar.  The dollar extended its losses after Fed Presidents Daly and Mester expressed their support for three Fed rate cuts this year.

The dollar had support from Tuesday’s better-than-expected US factory orders and job openings reports. Also, higher bond yields were bullish for the dollar after the 10-year T-note yield Tuesday rose to a 4-month high. 

US Feb JOLTS job openings unexpectedly rose +8,000 to 8.756 million, showing a stronger labor market than expectations of a decline to 8.730 million.

US Feb factory orders rose +1.4% m/m, stronger than expectations of +1.0% m/m.

The dollar weakened Tuesday after two voting Fed members said they favored three rate cuts this year.  San Francisco Fed President Daly said three 25 bp rate cuts in 2024 is a "reasonable baseline" forecast, though there is no urgency to lower rates right now given the economy's strength.  She added if inflation is stickier, the Fed may cut less, and if inflation falls more rapidly, more rate cuts may be warranted.  Also, Cleveland Fed President Mester said she still sees three rate cuts as likely appropriate this year but that "it's a close call" on whether fewer will be needed.

The markets are discounting the chances for a -25 bp rate cut at 7% for the next FOMC meeting on April 30-May 1 and 66% for the following meeting on June 11-12.

EUR/USD (^EURUSD) on Tuesday rose by +0.19%.  The euro Tuesday rebounded from a 1-1/2 month low and moved higher.  An upward revision to the Eurozone Mar S&P manufacturing PMI sparked some short covering in the euro.  Gains in the euro accelerated after the dollar retreated from a 4-month high.  The upside in the euro was limited by Tuesday’s weaker-than-expected German Mar CPI report, a dovish factor for ECB policy.

The Eurozone Mar S&P manufacturing PMI was revised upward by +0.4 to 46.1 from the previously reported 45.7.

ECB Feb 1-year inflation expectations eased to 3.1% from 3.3% in Jan, the lowest in 2 years.  Feb 3-year inflation expectations were unchanged at 2.5% from Jan, stronger than expectations of a decline to 2.4%.

German Mar CPI (EU harmonized) rose +0.6% m/m and +2.3% y/y, weaker than expectations of +0.7% m/m and +2.4% y/y.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 13% for its next meeting on April 11 and 99% for the following meeting on June 6.

USD/JPY (^USDJPY) on Tuesday fell by -0.04%.  The yen on Tuesday recovered from early losses and posted modest gains on speculation that Japanese authorities may be close to intervening in currency markets to support the yen after Japanese Finance Minister Suzuki reiterated Monday that the Japanese government will take appropriate measures against any excessive currency moves.  The yen on Tuesday initially moved lower due to strength in T-note yields after the 10-year T-note yield climbed to a 4-month high.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 11% for the following meeting on June 14.

June gold (GCM4) on Tuesday closed up +24.7 (+1.09%), and May silver (SIK24) closed up +0.850 (3.39%).  Precious metals today are moderately higher, with June gold posting a contract high and nearest-futures April gold climbing to an all-time high.  Also, silver prices climbed to a 4-month high.

A weaker dollar on Tuesday was bullish for metals.  Also, geopolitical risks boosted safe-haven demand for precious metals after Israel last Friday launched an airstrike on Iranian targets in Syria, and Iran threatened retaliation.  Tuesday’s weakness in stocks also boosted safe-haven demand for precious metals.   In addition, increased inflation expectations boosted demand for gold as an inflation hedge after the US 10-year breakeven inflation rate Tuesday rose to a 1-1/2 week high.  Silver garnered carryover support from Tuesday’s rally in copper prices to a 1-1/2 week high.  Higher global bond yields on Tuesday were a negative factor for precious metals.

More Precious Metal News from Barchart

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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