The dollar index (DXY00) is up sharply by +1.29% at a 3.25-month high. The dollar is extending Monday's rally today after oil prices soared to an 8.5-month high, boosting inflation expectations and reducing the chance of additional Fed rate cuts, a supportive factor for the dollar. Market expectations for Fed easing have fallen, with money markets now pricing 37 bp of Fed rate cuts this year, down from 60 bp last Friday. In addition, today's stock slump has boosted liquidity demand for the dollar.
NY Fed President John Williams said additional Fed interest rate cuts will be warranted if inflation slows further once most of the impact of tariffs has passed.
Kansas City Fed President Jeff Schmid said, "Inflation has been above the Fed's objective for nearly five years now, so I don't think we have room to be complacent."
Swaps markets are discounting the odds at 2% for a -25 bp rate cut at the next policy meeting on March 17-18.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -37 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
EUR/USD (^EURUSD) is down by -1.30% today at a 3.25-month low. The dollar's strength today is undercutting the euro. Also, today's +24% surge in European natural gas prices to a 3-year high threatens to slow economic growth and spur inflation in the Eurozone, negative factors for the euro. Today's stronger-than-expected Eurozone Feb CPI report was hawkish for ECB policy and supportive of the euro.
The Eurozone Feb CPI rose +1.9% y/y, stronger than expectations of +1.7% y/y. Feb core CPI rose +2.4% y/y, stronger than expectations of +2.2% y/y.
Swaps are discounting a 1% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.
USD/JPY (^USDJPY) today is up by +0.27%. The yen fell to a 5-week low against the dollar today as a surge in crude oil prices to an 8.5-month high is a negative factor for Japanese economic growth. Also, an unexpected increase in Japan's Jan jobless rate is bearish for the yen. In addition, higher T-note yields today are pressuring the yen.
Losses in the yen are limited today after Japan's Q4 capital spending report rose more than expected. Also, today's 3% slump in the Nikkei Stock Index to a 3-week low sparked some safe-haven demand for the yen.
Japan Q4 capital spending ex-software rose +7.3% y/y, stronger than expectations of +3.9% y/y.
The Japan Jan jobless rate unexpectedly rose +0.1 to 2.7%, showing a slightly weaker labor market than expectations of no change at 2.6%.
The markets are discounting an +8% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) today is down by -267.40 (-5.04%), and May COMEX silver (SIK26) is down -8.123 (-9.14%).
Gold and silver prices have fallen sharply today to 1-week lows. Today's rally in the dollar index to a 3.25-month high is negative for metals prices. Also, soaring global bond yields today are bearish for precious metals. In addition, today's sell-off in global equity markets has prompted investors to liquidate long positions in precious metals to cover margin calls on their stock holdings.
Precious metals also have safe-haven support amid the ongoing war in Iran and geopolitical risks in Ukraine, the Middle East, and Venezuela. In addition, uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty are prompting investors to cut holdings of dollar assets and shift into precious metals.
Strong central bank demand for gold is also supportive of prices, following the recent news that bullion held in China's PBOC reserves rose by +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves.
Finally, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC's December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.
Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high last Friday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 3.5-month low last Monday.
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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