Dollar Index Strengthens Amid Rising Yields and Fed Comments

The dollar index (DXY00) is up by +0.19% today, bolstered by rising T-note yields. Additionally, hawkish remarks from Chicago Fed President Goolsbee contributed to the dollar’s gains, as he indicated that the next Federal Reserve rate cut might take longer than expected due to economic uncertainty. Furthermore, the weakness in the British pound has also benefited the dollar, following a disappointing UK February CPI that pushed GBP/USD down to a two-week low. However, dollar gains are somewhat restricted as US February core capital goods new orders experienced an unexpected decline.

Mortgage Applications and Economic Indicators

In the week ending March 21, US MBA mortgage applications fell by -2.0%. Within this, the purchase mortgage sub-index increased by +0.7%, while the refinancing mortgage sub-index dropped by -5.3%. The average 30-year fixed-rate mortgage saw a slight decrease, falling by 1 basis point to 6.71%, down from 6.72% the previous week.

In other news, US February capital goods new orders (excluding defense and aircraft) unexpectedly fell by -0.3% month-over-month, contrary to expectations of a +0.2% increase and marking the largest decline in seven months. This has raised concerns in the markets regarding potential weaknesses in corporate capital spending driven by tariffs and ongoing economic uncertainty.

Goolsbee remarked that the Fed is no longer following the “golden path” seen in 2023 and 2024, suggesting the timeline for any forthcoming rate cuts is now less certain due to the economic landscape.

Upcoming Economic Reports to Watch

This week, market focus will shift to Thursday’s report on Q4 GDP, which is expected to remain unchanged at +2.3% quarter-over-quarter annualized. March pending home sales are anticipated to rise by +1.0% month-over-month. On Friday, economists forecast a +0.5% increase in February personal spending and a +0.4% rise in February personal income. Additionally, the February core PCE price index, the Fed’s preferred inflation measure, is predicted to increase by +0.3% month-over-month and +2.7% year-over-year. Meanwhile, the revised March University of Michigan consumer sentiment index is expected to stay at 57.9.

Markets are currently forecasting a 16% probability of a -25 basis point rate cut following the May 6-7 FOMC meeting.

Currency Trends: Euro and Yen

EUR/USD (^EURUSD) is down by -0.03% as a stronger dollar exerts downward pressure on the euro. Moreover, dovish comments from ECB Governing Council member Villeroy de Galhau contributed to the euro’s decline, as he stated that the ECB could still lower interest rates, given its progress in achieving the 2% inflation target.

Swaps indicate a 73% probability of a -25 basis point rate cut by the ECB during the April 17 policy meeting.

In contrast, USD/JPY (^USDJPY) has increased by +0.34%. Here, the yen is lower due to advancing T-note yields. Furthermore, easing price pressures are viewed as dovish for BOJ policy, adversely impacting the yen, especially after Japan’s February PPI services prices rose less than anticipated. Comments from BOJ Governor Ueda, indicating that the bank’s price projections will not be met until the latter half of the fiscal year, suggest no imminent interest rate hikes from the BOJ. Nonetheless, losses in the yen are moderated by the 10-year Japan JGB bond yield, which reached a 16-year high of 1.593% today, strengthening the yen’s interest rate differentials.

The Japan January leading index CI was revised upward by +0.3 to 108.3, up from the previous 108.0, while February PPI services prices rose by +3.0% year-over-year, falling short of expectations of +3.1% year-over-year.

Precious Metals Performance

April gold (GCJ25) is down by -3.00 (-0.10%), and May silver (SIK25) is down -0.027 (-0.08%). Precious metals retreated from early gains, influenced by a stronger dollar. Additionally, higher global bond yields are negatively impacting precious metals. Goolsbee’s comments about the Fed rate cut timeline further exerted pressure on these commodities.

Nevertheless, precious metals retain some support as an inflation hedge, following an increase in the US 10-year breakeven inflation rate to a three-week high. Moreover, heightened geopolitical risks in the Middle East, particularly as Israel resumes airstrikes and the US continues operations against Houthi rebels in Yemen, bolsters demand for safe-haven assets. Fund buying of gold supports its prices after long positions in ETFs reached a 17-month high. Silver also gained from a rally in copper prices, which hit a ten-month high after tariff threats on US copper imports were announced.

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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