Dollar Weakens as Hawkish ECB Comments Boost the Euro

The dollar index (DXY00) on Monday fell by -0.11%.  The dollar was undercut by strength in the euro, which rose on hawkish ECB comments.  Also, Monday’s weaker-than-expected U.S. Jan new home sales report weighed on the dollar. Higher T-note yields Monday limited declines in the dollar.

U.S. Jan new home sales rose +1.5% to 661,000, weaker than expectations of 684,000.

The markets are discounting the chances for a -25 bp rate cut at 1% for the March 19-20 FOMC meeting and 17% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Monday rose by +0.28%.  Hawkish comments from ECB President Lagarde and ECB Governing Council members Stournaras and Mahlouf boosted the euro Monday when they said the ECB shouldn’t rush into a decision to cut interest rates.

ECB President Lagarde said, “We are not there yet on inflation.  We need to get to 2% sustainably.”

ECB Governing Council member Stournaras said any monetary policy adjustments by the ECB must be gradual, and he sees the ECB’s first rate cut in June.

ECB Governing Council member Mahlouf said the ECB shouldn’t rush into a decision to cut interest rates but remain “very vigilant” of risks that wages might be rising at too fast a clip.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 4% for its next meeting on March 7 and 27% for the following meeting on April 113

USD/JPY (^USDJPY) on Monday rose by +0.13%.  On Monday, the yen dropped to a 1-1/2 week low against the dollar.  A decline in Japanese government bond yields weakened the yen’s interest rate differentials and weighed on the yen.  Easing price pressures in Japan knocked the 10-year JGB bond yield to a 3-week low Monday of 0.685% after Jan PPI service prices rose less than expected.  Also, Monday’s rally in the Nikkei Stock Index to a new record high reduced the safe-haven demand for the yen.  Losses in the yen accelerated as T-note yields rose.

Japan Jan PPI services prices eased to +2.1% y/y from +2.4% y/y in Dec, weaker than expectations of no change at +2.4% y/y.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 21% for its next meeting on March 19 and 76% for the following meeting on April 26.

April gold (GCJ4) Monday closed down -10.50 (-0.51%), and Mar silver (SIH24) closed down -0.456 (-1.98%).  Precious metals on Monday moved lower, with silver posting a 1-week low.  Higher global bond yields on Monday weighed on precious metals.  Expectations for Fed rate cuts have been delayed and are bearish for precious metals as swap markets have now priced in the chances of the first Fed rate cut to June from May.  Also, hawkish comments on Monday from ECB policymakers weighed on precious metals when they said the ECB shouldn’t rush into cutting interest rates. 

Silver retreated on negative carryover from a slide in iron ore prices Monday to a 4-month low on concerns about Chinese demand for industrial metals.  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 last Friday. 

Limiting losses in precious metals on Monday was a weaker dollar.  Also, the ongoing geopolitical risks in the Middle East and Ukraine have boosted safe-haven demand for precious metals. 

More Forex 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.