Dollar Index Rallies to Weekly High Amid Economic Indicators

The dollar index (DXY00) increased by +0.77% on Thursday, reaching a one-week high. This boost in the dollar came as recent indicators suggested strength in the U.S. economy, particularly after Q4 GDP figures remained unchanged. Additionally, January’s capital goods new orders (excluding defense, aircraft, and parts), serving as a proxy for capital spending, rose more than analysts had predicted.

The dollar’s ascent was further fueled by President Trump’s announcement of upcoming 25% tariffs on imports from Canada and Mexico, effective March 4. He also noted that an additional 10% tariff on China would take effect on the same date. Hawkish remarks from Cleveland Fed President Hammack, who stated that U.S. interest rates are not presently “meaningfully restrictive” and should be maintained for an extended period, kept the dollar’s gains intact.

Mixed Signals for the Dollar

However, several bearish factors emerged for the dollar on Thursday. Weekly jobless claims surged to a 2.5-month high, and January’s pending home sales data fell short of expectations.

Economic Reports Reflecting Stability

The U.S. Q4 GDP was confirmed at +2.3% (quarter-over-quarter annualized). The core PCE price index for Q4 saw an upward revision to +2.7%, up from the previously reported +2.5%.

In January, new orders for capital goods (non-defense, excluding aircraft) increased by +0.8% month-over-month, surpassing the anticipated +0.3% growth.

On another front, weekly initial unemployment claims rose by +22,000, reaching 242,000, which was well above the expected 221,000, suggesting a softer labor market. Meanwhile, January’s pending home sales dropped by -4.6%, much steeper than the anticipated decrease of -0.9%, marking the largest drop in nine months.

Federal Reserve Officials Comment on Economic Conditions

Kansas City Fed President Schmid noted that the Fed may need to weigh inflation risks against growth considerations. He observed, “While the risks to inflation appear to be to the upside, discussions with contacts in my district and some recent data suggest that elevated uncertainty might weigh on growth.” Additionally, Cleveland Fed President Hammack reiterated the position that U.S. rates are not “meaningfully restrictive,” emphasizing the need to wait for signs of inflation returning to the Fed’s 2% target.

This week’s economic calendar is packed with key reports. The January PCE price index, the Fed’s preferred measure of inflation, is projected to slightly decrease to +2.5% year-over-year, down from December’s +2.6%. The core index is expected to drop to +2.6%, compared to December’s +2.8%. If these estimates hold true, they would remain above their 3-3/4 year lows of +2.1% and +2.6%, respectively, significantly above the Fed’s target.

Market expectations currently estimate a 3% probability of a -25 bp rate cut at the upcoming FOMC meeting on March 18-19.

Euro and Yen Markets React to Dollar Strength

The EUR/USD (^EURUSD) decreased by -0.77%, reaching a two-week low on Thursday. President Trump’s tariff comments bolstered the dollar and pressured the euro. Further, the decline in the 10-year German bund yield to a two-week low weakened the euro’s interest rate position.

Despite these pressures, Eurozone economic indicators provided some support. February’s economic confidence rose by +1.0 to a five-month high of 96.3, exceeding the expected 95.9. In January, the Eurozone’s M3 money supply increased by +3.6% year-over-year, though it fell short of the anticipated +3.8% growth.

Swaps indicate a 100% likelihood of a -25 bp rate cut during the ECB’s policy meeting on March 6.

The USD/JPY (^USDJPY) rose by +0.37%. The yen faced downward pressure as the dollar strengthened following Trump’s tariff announcements. Additionally, higher Treasury yields contributed to the yen’s struggle against the dollar. Losses in the yen were limited as investors awaited Friday’s February Tokyo CPI report and its implications for BOJ policy.

Precious Metals Retreat Amid Strong Dollar

April gold (GCJ25) settled down -34.70 (-1.18%), while March silver (SIH25) dropped -0.471 (-1.46%). Precious metals took a hit as the dollar index reached a weekly high. Higher Treasury yields and Hammack’s hawkish remarks regarding U.S. interest rates added to the pressure on precious metals. Furthermore, the significant drop in pending home sales in January was a negative signal for industrial metals demand, weighing on silver prices.

Despite the downturn, precious metals still found some support from safe-haven demand following Trump’s tariff confirmation. Fund buying in gold persisted, as long positions in ETFs climbed to a 13-3/4 month high on Wednesday.

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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.

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