Dollar Fades on Euro Strength

The dollar index (DXY00) on Friday fell by -0.01%.  The dollar on Friday gave up an early advance and finished slightly lower.  The euro moved higher Friday and weighed on the dollar after the 10-year German bund yield climbed to a 2-1/2 month high, strengthening the euro’s interest rate differentials.  The dollar on Friday initially moved higher after the stronger-than-expected U.S Jan PPI report pushed up bond yields and pushed back expectations for Fed interest rate cuts. 

Friday’s U.S. economic reports were mixed for the dollar.  On the bearish side, Jan housing starts unexpectedly fell -14.8% m/m to a 5-month low of 1.331 million, weaker than expectations of no change at 1.460 million.  Also, Jan building permits, a proxy for future construction, unexpectedly fell -1.5% m/m to 1.470 million, weaker than expectations of an increase to 1.512 million. Conversely, Jan PPI final demand eased to +0.9% y/y from +1.0% y/y in Dec, stronger than expectations of +0.6% y/y. Also, the University of Michigan U.S. Feb consumer sentiment index rose +0.6 to a 2-1/2 year high of 79.6.

Fed comments on Friday were mostly hawkish for Fed policy and bullish for the dollar.  Richmond Fed President Barkin said the hotter-than-expected inflation figures this week underscore why policymakers want to see more data before cutting interest rates.  Also, Atlanta Fed President Bostic said there’s no rush to cut interest rates with the U.S. labor market and economy still strong, and it may “take some time” before inflation is heading sustainably toward the Fed’s 2% target.

The markets are discounting the chances for a -25 bp rate cut at 12% for the March 19-20 FOMC meeting and 37% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Friday rose by +0.03%.  The euro on Friday recovered from early losses and posted modest gains as the dollar weakened.  The euro also garnered support on hawkish comments today from ECB Executive Board member Schnabel, who said the ECB must take its time before cutting interest rates. 

The German Jan wholesale price index eased to -2.7% y/y from -2.6% y/y in Dec.

ECB Executive Board member Schnabel said, “The recent long period of high inflation suggests that to avoid being forced into adopting a stop-and-go policy akin to that of the 1970s, we must be cautious not to adjust our policy stance prematurely.”

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 44% for the following meeting on April 11.

USD/JPY (^USDJPY) on Friday rose by +0.22%.  The yen on Friday moved lower against the dollar as a stronger-than-expected U.S. Jan PPI report pushed T-note yields higher.   Also, Friday’s rally in the Nikkei Stock Index to a 34-year high has reduced safe-haven demand for the yen. 

Friday’s Japanese economic news supported the yen after the Dec tertiary industry index rose +0.7% m/m, stronger than expectations of +0.2% m/m.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 33% for its next meeting on March 19 and 69% for the following meeting on April 26.

April gold (GCJ4) Friday closed +9.20 (+0.46%), and Mar silver (SIH24) closed +0.524 (+2.28%).  Precious metals posted moderate gains on Friday, with silver climbing to a 5-week high.  Weakness in the dollar on Friday was supportive for metals.  Gold also found support as an inflation hedge after the U.S. 10-year breakeven inflation rate Friday rose to a 3-1/2 week high. 

On the bearish side, higher global bond yields on Friday were bearish for precious metals.  Also, Friday’s weaker-than-expected reports on U.S. Jan housing starts and building permits are negative for industrial metals demand and bearish for silver prices.  In addition, 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 Thursday. 

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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.

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