Dollar Index Hits Three-Week High Amid Hawkish Fed Signals
The dollar index (DXY00) rose by +0.37% on Wednesday, reaching its highest point in three weeks. This increase was driven by hawkish commentary from Federal Reserve officials, leading to higher T-note yields, which strengthened the dollar. Notably, Chicago Fed President Goolsbee, Minneapolis Fed President Kashkari, and St. Louis Fed President Musalem emphasized that U.S. trade policies could inflate prices and may compel the Fed to maintain interest rates for a longer duration. Additionally, the pullback in stock markets increased demand for liquidity in the dollar. The dollar also benefited from weakness in the British pound, which dropped to a two-week low following disappointing UK February CPI data. However, the dollar’s gains were somewhat muted by an unexpected decline in U.S. February core capital goods orders.
MBA Mortgage Applications and Economic Indicators
In the latest report, U.S. MBA mortgage applications fell by -2.0% for the week ending March 21. The purchase mortgage sub-index saw a slight increase of +0.7%, while the refinancing sub-index dropped by -5.3%. The average 30-year fixed mortgage rate fell by one basis point to 6.71%, down from 6.72% the previous week.
Core Capital Goods Orders and Fed Commentary
The latest data revealed that U.S. February capital goods new orders (excluding defense aircraft and parts) unexpectedly fell by -0.3% month-over-month, contrasting with expectations of a +0.2% increase. This marked the steepest decline in seven months, indicating potential weakness in corporate capital spending amid ongoing tariffs and economic uncertainties.
Chicago Fed President Goolsbee commented that the Fed is no longer on the “golden path” observed in early 2023 and 2024. He indicated that the next rate cut may be delayed due to economic uncertainties. Similarly, Minneapolis Fed President Kashkari noted that inflation remains above the Fed’s 2% target, though rates may be reduced within the next year or two as price pressures subside. St. Louis Fed President Musalem cautioned that the inflationary impact of tariffs might not be temporary, suggesting the Fed could keep interest rates steady for an extended period.
Upcoming Economic Reports
This week, attention will shift to Thursday’s report on Q4 GDP, which is anticipated to remain unchanged at +2.3% quarter-over-quarter annualized, along with March pending home sales expected to rise +1.0% month-over-month. On Friday, February personal spending is projected to increase by +0.5% month-over-month, while February personal income is expected to rise +0.4% month-over-month. The February core PCE price index, the Fed’s preferred inflation measure, is anticipated to climb +0.3% month-over-month, reaching +2.7% year-over-year. Additionally, the revised March University of Michigan U.S. consumer sentiment index is expected to stay at 57.9.
Currently, markets assess a 16% chance of a -25 basis point rate cut following the May 6-7 FOMC meeting.
Currency Movements and Central Bank Outlooks
On Wednesday, EUR/USD (^EURUSD) declined by -0.38%, marking a three-week low, as a stronger dollar weighed on the euro. Dovish comments from ECB Governing Council member Villeroy de Galhau also pressured the euro, as he noted that the ECB could consider interest rate cuts, having nearly met its inflation target.
Swaps indicate a 76% probability of a -25 basis point rate cut by the ECB at its policy meeting on April 17.
USD/JPY (^USDJPY) rose by +0.39% on Wednesday, with the yen falling moderately against the dollar due to increased T-note yields. Expectations for BOJ policy are also dovish, following remarks from BOJ Governor Ueda, who suggested that the BOJ’s inflation projections may not be achieved until the latter half of the fiscal year, indicating no near-term rate hikes. Nevertheless, losses for the yen were limited as the 10-year Japan JGB bond yield climbed to a 16-year high of 1.593%, enhancing the interest rate differentials.
Japan’s Economic Data and Monetary Policy
The Japan January leading index CI was revised upward by +0.3, reaching 108.3 from an earlier estimate of 108.0. For February, PPI services prices rose by +3.0% year-over-year, slightly below expectations of +3.1%.
Governor Ueda stated, “Our projection is that the underlying price trend will broadly reach 2% in the second half of our outlook period,” confirming that the BOJ intends to maintain steady monetary policy for now.
Precious Metals Performance
April gold (GCJ25) closed down -3.40 (-0.11%), while May silver (SIK25) gained +0.035 (+0.10%). Precious metals ended the day mixed, influenced by a stronger dollar and higher global bond yields, which typically detract from precious metals’ appeal. Furthermore, comments from Fed officials suggesting delayed rate cuts exerted pressure on metal prices.
However, precious metals found some support as an inflation hedge, with the U.S. 10-year breakeven inflation rate reaching a three-week high. Additionally, geopolitical risks in the Middle East have spurred demand for safe-haven assets like gold, particularly following Israel’s resumed airstrikes in Gaza and U.S. military actions against Houthi rebels in Yemen. Fund buying has also contributed to gold’s strength as long positions in ETFs climbed to a 17-month high Tuesday. Silver benefited from a bullish rally in copper prices, which recently reached a ten-month high amid trade policy threats from President Trump regarding U.S. copper imports.
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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