Dollar Finds Support on Hawkish Fed Comments

The dollar index (DXY00) today recovered from early losses and moved up to a 5-1/2 month high based on hawkish Fed comments.  San Francisco Fed President Daly said Monday night that there’s “no urgency” for the Fed to adjust interest rates and Fed Vice Chair Jefferson said today that if inflation remains elevated, the Fed will hold interest rates higher for longer.  The dollar also garnered support on today’s news that US March manufacturing production rose more than expected.

The dollar today initially moved lower after US Mar housing starts and building permits fell more than expected, a dovish factor for Fed policy.  The dollar was also under pressure as stocks stabilized, which curbed liquidity demand for the dollar. 

US Mar housing starts fell -14.7% m/m to a 7-month low of 1.321 million, weaker than expectations of 1.485 million.  Mar building permits, a proxy for future construction, fell -4.3% m/m to an 8-month low of 1.458 million, weaker than expectations of 1.510 million.

US Mar manufacturing production rose +0.5% m/m, stronger than expectations of +0.2% m/m.

San Francisco Fed President Daly said Monday evening that there’s “no urgency” for the Fed to adjust interest rates.  She said, “The labor market’s not giving us any indication it’s faltering, and inflation is still above our target, and we need to be confident it is on a path to come down to our target before we would feel the need to react.”

Fed Vice Chair Jefferson said, “If incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer.”

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 23% for the following meeting on June 11-12.

EUR/USD (^EURUSD) today is up by +0.12%.  The euro recovered from a 5-1/2 month low and is moderately higher. Today’s German Apr ZEW report rose more than expected to a 2-year high and was bullish for the euro.  Gains in the euro are limited by dovish comments from ECB Governing Council member Makhlouf, who said the ECB should be able to cut interest rates at its next meeting in June if the trend in inflation persists.

The German Apr ZEW survey expectations of economic growth rose +11.2 to a 2-year high of 42.9, stronger than expectations of 35.5.

Swaps are discounting the chances for a -25 bp rate cut by the ECB at 88% for its next meeting on June 6.

USD/JPY (^USDJPY) today is up +0.21%.  The yen today extended Monday’s losses to a new 33-year low against the dollar. Higher T-note yields today are weighing on the yen.  Comments today from Japanese Finance Minister Suzuki failed to support the yen when he said he was watching currency market moves closely but refrained from declaring whether recent moves by the yen could be considered rapid.   

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 33% for the following meeting on June 14.

June gold (GCM4) this morning is up +3.0 (+0.13%), and May silver (SIK24) is down -0.627 (-2.10%).  Precious metals today are mixed.  Gold has safe-haven support on concern about Iran-Israel tensions after Israeli military officials said they have no choice but to respond against Iran for its weekend drone and missile attack against Israel.  Precious metals also have support as a store of value after ECB Governing Council member Makhlouf said the ECB should be able to cut interest rates at its next meeting in June.

Today’s rally in the dollar index to a 5-1/2 month high is bearish for metals.  Also, hawkish comments Monday night from San Francisco Fed President Daly and today from Fed Vice Chair Jefferson were bearish for precious metals when they said they support holding interest rates steady until inflation falls to target.  In addition, higher global bond yields today are negative for precious metals. Silver prices are also weighed down by industrial metal demand concerns after US Mar housing starts and building permits fell more than expected, and after China Mar industrial production rose less than expected.  

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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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