Dollar Strengthens Amid Fed’s Steady Stance on Rates
Market Reaction Following Fed’s Decision
The dollar index (DXY00) rose by +0.10% on Wednesday. This uptick followed the Federal Reserve’s decision to keep interest rates unchanged. Notably, the Fed’s statement removed references to inflation showing progress, implying that officials may maintain their current stance longer than previously anticipated. Comments from Fed Chair Powell, stating that economic activity remains strong and there’s no rush to cut rates, also supported the dollar’s gains.
Tariff Uncertainty Eases
However, in the afternoon, the dollar retreated slightly from its highs as concerns regarding tariffs softened. U.S. Commerce Secretary nominee Lutnick indicated that Canada and Mexico could avoid new tariffs if they enhance border security this weekend.
Fed’s Decision Details
The FOMC voted unanimously to keep the fed funds target range steady at 4.25%-4.50%. The committee described inflation as “somewhat elevated” but dropped the phrase indicating progress toward the 2% target. Additionally, instead of previous remarks about easing labor market conditions, the statement now emphasizes that “the unemployment rate has stabilized at a low level” and that “labor market conditions remain solid.”
Fed Chair’s Remarks on Economic Growth
Chair Powell highlighted continued economic expansion, stating, “With our policy stance significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”
Market Expectations for Rate Cuts
Currently, markets are estimating a 20% chance of a -25 basis point rate cut at the FOMC meeting scheduled for March 18-19.
Euro Under Pressure
In European markets, EUR/USD (^EURUSD) dipped by -0.09%. The euro faced challenges due to weak Eurozone economic data, including a money supply increase of only +3.5% year-on-year in December, which fell short of the expected 3.9% growth.
German Consumer Confidence Declines
The German February GfK consumer confidence index also dropped, down -1.0 to -22.4. Market swaps are fully pricing in a -25 basis point rate cut by the European Central Bank (ECB) in their Thursday meeting.
Yen Stabilizes Despite Mixed Signals
For USD/JPY (^USDJPY), a slight decrease of -0.22% was noted, with the yen gaining some ground on the dollar. This was partly due to hawkish minutes from the December Bank of Japan (BOJ) meeting suggesting potential rate increases. However, a surprising drop in Japan’s January consumer confidence index to a 1-¾-year low limited the yen’s gains.
Precious Metals Gain Ground
February gold (GCG25) closed up +2.30 (+0.08%), while March silver (SIH25) rose +0.511 (+1.65%) as precious metals saw moderate gains, with silver reaching a 1-½ week high. Support came from remarks made by President Trump regarding potential universal tariffs, which could raise inflationary pressures and drive demand for precious metals as an inflation hedge.
Overview of Precious Metals Performance
Despite the stronger dollar posing challenges, precious metals managed to post gains. The hawkish stance from the BOJ and the Fed’s cautious position on rate cuts also influenced their performance, signaling a stable economic outlook which could deter immediate investments in precious metals.
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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