Dollar Declines as T-Note Yields Fall on Dovish U.S. Reports

The dollar index (DXY00) on Thursday fell by -0.40%.  The dollar retreated Thursday after U.S. Jan retail sales and Jan manufacturing production fell more than expected, which boosted hopes for Fed interest rate cuts.  Also, strength in the euro weighed on the dollar after ECB President Lagarde cautioned against cutting interest rates too soon. 

Thursday’s U.S. economic reports were net bearish for the dollar.  On the bearish side, Jan retail sales fell -0.8% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 10 months.  Also, Jan manufacturing production unexpectedly fell -0.5% m/m, weaker than expectations of no change.  On the bullish side, weekly initial unemployment claims unexpectedly fell -8,000 to 212,000, showing a stronger labor market than expectations of an increase to 220,000.  Also, the Feb NAHB housing market index rose +4 to a 6-month high of 48, stronger than expectations of 46.  In addition, the Feb Philadelphia Fed business outlook survey rose +15.8 to a 6-month high of 5.2, stronger than expectations of -8.1.

The markets are discounting the chances for a -25 bp rate cut at 14% for the March 19-20 FOMC meeting and 46% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Thursday rose by +0.39%.  The euro on Thursday moved higher on dollar weakness and hawkish comments from ECB President Lagarde who cautioned against the ECB rushing into interest rate cuts.  The upside in EUR/USD was limited after the ECB cut its 2024 Eurozone GDP forecast.

ECB President Lagarde cautioned against the ECB rushing into interest rate cuts saying, “We do not have enough evidence yet to have the confidence that we are going to hit our medium-term 2% inflation target and that it will be sustainably there.”

The ECB cut its 2024 Eurozone GDP forecast to 0.8% from a November estimate of 1.2% and cut its 2024 Eurozone inflation forecast to 2.7% from 3.2%.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 7% for its next meeting on March 7 and 54% for the following meeting on April 11.

USD/JPY (^USDJPY) on Thursday fell by -0.39%.  The yen strengthened Thursday, boosted by lower T-note yields. Also, the yen has carryover support from Wednesday when Japan’s top currency chief, Kanda, and finance minister, Suzuki, raised the threats of Japanese intervention in the currency markets when they said they are watching foreign currency developments with an even stronger sense of urgency after the yen slumped to a 2-3/4 month low against the dollar.

Thursday’s Japanese economic news was bearish for the yen.  Japan Q4 GDP unexpectedly contracted -0.4% (q/q annualized), weaker than expectations of +1.1%.  Also, the Q4 GDP deflator eased to +3.8% y/y from +5.2% y/y in Q4, weaker than expectations of +4.0% y/y.  In addition, Japan Dec industrial production was revised lower to +1.4% m/m from the previously reported +1.8% m/m.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 31% for its next meeting on March 19 and 69% for the following meeting on April 26.

April gold (GCJ4) Thursday closed +10.60 (+0.53%), and Mar silver (SIH24) closed +0.564 (+2.52%).  Precious metals on Thursday closed moderately higher.  Thursday’s weaker dollar was supportive for metals prices. Also, Thursday’s weaker-than-expected U.S. Jan retail sales and Jan manufacturing production reports were dovish for Fed policy and were bullish for precious metals.  In addition, lower T-note yields Thursday were supportive for precious metals.

On the bearish side, gold remains under pressure from the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Wednesday.  Also, Thursday’s action by the ECB to cut its 2024 Eurozone GDP forecast was negative for industrial metals demand and silver prices.

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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.

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