The Dollar Recovers as Fed Officials Discuss Interest Rates
Markets React to Recent Economic Data and Fed Officials’ Remarks
The dollar index (DXY00) climbed by +0.45% on Tuesday, recovering some lost ground after hitting a 2-month low last Thursday. This rise can be attributed to a +7 basis point increase in the 10-year Treasury note yield.
Support for the dollar also came from recent comments by Federal Reserve officials. Fed Governor Waller stated on Monday that current economic data justifies keeping interest rates steady until there is noticeable progress on inflation. However, he expressed concerns that the Consumer Price Index (CPI) might face seasonal adjustment issues. If inflation trends as it did in 2024, Waller hinted that the Fed could consider cutting rates “at some point this year.”
Fed Presidents Stress Continued Caution Over Inflation
On the same day, San Francisco Fed President Mary Daly emphasized the necessity of maintaining restricted monetary policy until inflation shows more definite signs of improvement. She indicated that while inflation will eventually stabilize, it’s likely to take longer than anticipated. Sounding a note of caution, she suggested the Fed should delay any monetary policy adjustments until the overall impact of previous administration policies becomes clearer.
Markets are eagerly awaiting the release of the minutes from the Federal Open Market Committee (FOMC) meeting held on January 28-29. At that meeting, the FOMC opted to maintain the federal funds target range at 4.25-4.50%, after implementing a total rate cut of 100 basis points in the latter half of 2024.
Homebuilder Confidence Hits 5-Month Low, Manufacturing Index Improves
In housing news, the NAHB US homebuilder confidence index decreased by -5 points, landing at a 5-month low of 42. Homebuilders are grappling with high mortgage rates and the looming threat of increased construction costs driven by inflation and tariffs.
Conversely, the February Empire manufacturing index experienced a notable rebound, rising to 5.7 from January’s -12.6. This result far surpassed market forecasts, which had predicted an increase to zero.
Currently, the markets are estimating only a 2% probability for a -25 basis point rate cut at the upcoming FOMC meeting scheduled for March 18-19.
EUR and JPY Showing Mixed Responses to Global Events
The EUR/USD (^EURUSD) fell by -0.36%, primarily due to dollar strength. The euro’s weakness stems from tariff anxiety following President Trump’s announcement of reciprocal tariffs set for implementation by April 1, which could significantly impact European economies. However, the euro found some support from optimism surrounding potential resolutions to the Russian-Ukraine conflict after productive meetings between U.S. and Russian officials in Saudi Arabia.
Swaps currently anticipate a 98% chance of a -25 basis point rate cut by the European Central Bank (ECB) during its policy meeting on March 6.
In contrast, the USD/JPY (^USDJPY) gained +0.30%, recovering from sharp declines last week. The yen received backing when Japanese Prime Minister Ishiba declared that the Japanese economy is on a path toward achieving sustainable inflation, supported by rising wages—a statement seen as hawkish for Bank of Japan policy.
Precious Metals Rally Following Goldman Sachs Prediction
On the commodities front, April gold (GCJ25) closed up +48.30 (+1.67%), while March silver (SIH25) rose by +0.518 (+1.58%). Gold prices climbed after Goldman Sachs revised its year-end target for gold to $3,100, driven by increased central bank demand and inflows into gold ETFs. The investment bank also noted that economic policy uncertainty, intensified by tariff concerns, is adding support for gold. Nevertheless, prices for precious metals faced pressure from the robust dollar and the recent rise in 10-year Treasury yields.
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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