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“Gold Surges as Dollar Declines and Bond Yields Fall”

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Dollar Weakens as Economic Signals Shift: A Closer Look

Soft Bond Yields and Weaker GDP Reports Apply Pressure on the Dollar

The dollar index (DXY00) dropped by -0.18% on Thursday, continuing a downward trend. Falling bond yields contributed to this decline, with the yield on the 10-year T-note reaching a 6-week low. As bond yields decreased, the advantage of holding dollars weakened. Additionally, strong stock market performance led to a reduced demand for liquidity in dollars. The dollar’s fall was exacerbated by disappointing U.S. Q4 GDP figures and December pending home sales data. However, an unexpected decrease in weekly jobless claims provided some support for the dollar and suggested a tighter labor market.

US Q4 GDP increased by +2.3% on an annualized basis, falling short of expectations which were set at +2.6%. Personal consumption during Q4 grew by +4.2%, exceeding forecasts of +3.2%. Meanwhile, the core PCE deflator for Q4 met expectations, rising by +2.5%.

Initial unemployment claims in the U.S. made a surprising drop, falling by -16,000 to 207,000. This was much better than the anticipated increase to 225,000, signaling a more robust labor market than previously expected.

In December, pending home sales fell by -5.5%, down significantly from expectations of no change and marking the steepest decline in five months.

Market projections indicate a 17% chance for a -25 bp rate cut at the next Federal Open Market Committee (FOMC) meeting set for March 18-19.

The EUR/USD (^EURUSD) pair rose by +0.07%, recovering from earlier losses following comments by ECB President Christine Lagarde, who stated, “The conditions for a recovery in the Eurozone remain in place.” Initially, the euro dipped after the ECB announced a cut of -25 bp to interest rates and reported lower-than-expected Eurozone Q4 GDP growth.

In January, Eurozone economic confidence improved, gaining +1.5 to 95.2, surpassing expectations of 94.1. However, Q4 GDP in the Eurozone was unchanged quarter-on-quarter and grew by +0.9% year-on-year, which was weaker than anticipated growth rates of +0.1% q/q and +1.0% y/y.

As expected, the ECB reduced the deposit facility rate by -25 bp to 2.75%. Lagarde noted, “The economy is still facing headwinds, but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time.” She highlighted that while the labor market has shown signs of softening, it remains robust with low unemployment rates. Furthermore, she cautioned against premature discussions regarding the cessation of interest rate cuts.

Swaps are currently pricing in a 35% probability of another -25 bp rate cut by the ECB during its meeting on March 6.

On Thursday, the USD/JPY (^USDJPY) declined by -0.71%, with the yen gaining ground after BOJ Deputy Governor Himino’s hawkish comments regarding interest rate adjustments. Himino indicated that the Bank of Japan (BOJ) would continue to raise rates if economic conditions warranted such action. Additionally, the BOJ’s decision to phase out its fund-provisioning program aims to remove 77 trillion yen ($500 billion) in loans from its balance sheet by 2028, moving toward normalization of policy.

Despite last week’s interest rate hike, Himino remarked on Japan’s negative real interest rate status, reinforcing the plan for continued rate hikes if economic expectations are met.

In commodities, February gold (GCG25) finished Thursday up +53.20 (+1.92%) and March silver (SIH25) was up +1.100 (+3.50%). Precious metals experienced significant gains, buoyed by a weaker dollar and lower global bond yields. The ECB’s interest rate cut also added bullish momentum for these assets. The muted global growth signals implied by disappointing GDP figures from both the U.S. and Eurozone suggest that precious metals might be seen as safer investments.

Additionally, remarks from President Trump about potentially applying universal tariffs could heighten inflation fears, further boosting the demand for precious metals as hedges against inflation.

However, the strength in stocks may counteract some of the safe-haven appeal for precious metals. Moreover, comments from BOJ Deputy Governor Himino indicating continued rate hikes could put downward pressure on precious metal prices.


On the date of publication, Rich Asplund did not hold positions in any securities mentioned in this article. All information herein is for informational purposes only. Please refer to the Barchart Disclosure Policy for more information.

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

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