USA Dollar

Dollar Recovers Slightly as T-note Yields Move Higher

The dollar index (DXY00) Monday rose slightly by +0.15% on some short-covering after last Friday’s 2-month low.  The dollar index also saw support from Monday’s +2.1 bp rise in the 10-year T-note yield, which modestly improved the dollar’s interest rate differentials.

The FX markets are looking ahead to Tuesday’s U.S. CPI report, which will impact the odds of a Fed interest rate cut over the next few months.  The consensus is for tomorrow’s Feb U.S. CPI to be unchanged from Jan at +3.1% y/y, which would be 0.1 point above the 2-3/4 year low of +3.0% posted in June 2023.  The Feb core CPI is expected to ease to a new 2-3/4 year low of +3.7% y/y from Jan’s current 2-3/4 year low of +3.9% y/y. 

The markets are discounting the chances for a -25 bp rate cut at 4% for the March 19-20 FOMC meeting, 25% for the following meeting on April 30-May 1, and 86% for the meeting after that on June 11-12.

Last Friday, the dollar index posted a 2-month low on the net dovish U.S. unemployment report. U.S. Feb nonfarm payrolls rose +275,000, stronger than expectations of +200,000.  However, Jan payrolls were revised downward to +229,000 from the previously reported +353,000.  The Feb unemployment rate rose +0.2 to a 2-year high of 3.9%, showing a weaker labor market than expectations of no change at 3.7%.  U.S. Feb average hourly earnings eased to +4.3% y/y from +4.4% y/y in Jan.

The dollar was also undercut last week after Fed Chair Powell said in Senate testimony that the Fed is “not far” from being confident enough to start cutting interest rates. 

EUR/USD (^EURUSD) Monday fell slightly by -0.17%.  The euro saw some carry-over bearishness from dovish comments last Friday from ECB Governing Council members Nagel and Villeroy de Galhau, who said the ECB could begin cutting interest rates in the spring.  Also, ECB President Lagarde last week said that the ECB could start cutting rates as soon as June.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 13% for its next meeting on April 11 and 95% for the following meeting on June 6.

USD/JPY (^USDJPY) traded slightly lower by -0.07%.  The yen saw some continued support from expectations for the Bank of Japan to begin raising interest rates within the next two months. Reuters reported last Friday that an increasing number of BOJ policymakers are leaning toward scrapping the BOJ’s negative interest rate at this month’s policy meeting, given expectations of larger wage increases this year.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 67% for its next meeting on March 19 and 88% for the following meeting on April 26.

April gold (GCJ4) Monday closed +3.10 (+0.14%), and May silver (SIK24) is up +0.166 (+0.68%).  April gold Monday consolidated below last Friday’s contract high, and March gold consolidated below last Friday’s all-time record nearest-futures high. The underlying sentiment for gold remains bullish, with market expectations that the Fed and ECB will begin cutting interest rates in June.  Precious metals prices also have underlying support from Middle East geopolitical tensions. 

However, precious metals saw some downward pressure Monday from the slightly higher dollar index.  Also, funds continue to liquidate their long gold positions after long gold holdings in ETFs fell to a 4-year low last Thursday.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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