The dollar index (DXY00) rose sharply to a 3.25-month high of +1.29%. The dollar was a supportive factor for the greenback on Monday after oil prices rose to an 8.5-month high, raising inflation expectations and reducing the chance of the Fed cutting additional rates. Market expectations for Fed easing have eased, with money markets now pricing in a Fed rate cut of 37 bp this year, down from 60 bp last Friday. In addition, today’s stock decline has increased liquidity demand for the dollar.
NY Fed President John Williams said additional Fed interest rate cuts would be warranted if inflation slows further once most of the effects of tariffs wear off.
“Inflation has been above the Fed’s target for almost five years, so I don’t think we have room for complacency,” Kansas City Fed President Jeff Schmidt said.
Exchange markets are cutting odds on a -25 bp rate cut at the next policy meeting on March 17-18 at 2%.
The dollar continues to see fundamental weakness as the FOMC is expected to cut interest rates by -37 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to keep rates unchanged in 2026.
EUR/USD (^EURUSD) is down 3.25-months by -1.30% today. Dollar strength lowers euro today. Also, a 24% increase in European natural gas prices today to a 3-year high threatens to slow economic growth and spur inflation in the Eurozone, negative factors for the Euro. The stronger-than-expected Eurozone February CPI report was a scare for ECB policy and support for the euro.
Eurozone February CPI rose +1.9% y/y, stronger than expectations of +1.7% y/y. February core CPI rose +2.4% y/y, stronger than expectations of +2.2% y/y.
Swaps discount a 1% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.
USD/JPY (^USDJPY) is up +0.27% today. The yen fell to a 5-week low against the dollar today as crude oil prices hit an 8.5-month high, a negative factor for Japan’s economic growth. Also, an unexpected rise in Japan’s jobless rate is significant for the yen. In addition, today’s higher T-note yields are putting pressure on the yen.
Losses in the yen were limited today after Japan’s Q4 investment spending report came in higher than expected. Also, today’s 3% drop in the Nikkei stock index to a 3-week low created some safe-haven demand for the yen.
Japan’s Q4 capital expenditure rose +7.3% y/y ex-post, stronger than expectations of +3.9% y/y.
Japan’s jobless rate unexpectedly rose +0.1 to 2.7%, showing a slightly weaker labor market than expected for no change at 2.6%.
Markets are discounting a +8% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) is down by -267.40 (-5.04%) today, and May COMEX silver (SIK26) is down -8.123 (-9.14%).
Gold and silver prices fell to one-week lows today. Today’s rally in the dollar index is negative for metals prices to a 3.25-month high. Also, global bond yields are lower for precious metals today. In addition, today’s selloff in global markets is prompting investors to liquidate long positions in precious metals to cover margin calls on their holdings.
Precious metals also have safe-haven support amid the ongoing war in Iran and geopolitical risks in Ukraine, the Middle East and Venezuela. In addition, uncertainty over US tariffs, US political turmoil, a large US deficit, and government policy uncertainty are prompting investors to reduce dollar holdings and shift to precious metals.
Strong central bank demand for gold is also supporting prices, following recent news that bullion held in China’s PBOC reserves rose to 74.19 million troy ounces from 40,000 ounces in January, the 15th consecutive month the PBOC has increased gold reserves.
Finally, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC’s December 10 announcement of a $40 billion monthly injection of liquidity into the US financial system.
Fund demand for the precious metal remains strong, with long-term holdings in gold ETFs hitting a 3.5-year high last Friday. Also, long holdings in silver ETFs hit a 3.5-year high on Dec. 23, although the rally since last Monday pushed them to a 3.5-month low.
As of the date of publication, Amir Espland had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
