The dollar index (DXY00) Wednesday rose by +0.17%. The dollar Wednesday posted modest gains on improved chances for early action on President Trump’s tax cut plans after House Republicans passed a budget blueprint Tuesday evening. Hawkish comments Wednesday from Atlanta Fed President Bostic also supported the dollar when he said the Fed needs to keep monetary policy restrictive to put downward pressure on inflation. Gains in the dollar were limited after US Jan new home sales fell more than expected.
US Jan new home sales fell -10.5% m/m to 657,000, weaker than expectations of 680,000.
Atlanta Fed President Bostic said, “We need to be in a restrictive posture” on interest rates to put downward pressure on inflation.
The remainder of this week’s US economic calendar is busy. Thursday’s US Q4 GDP report is expected to show an increase of +2.3% (q/q annualized), with a +4.1% increase in personal consumption. Friday’s Jan PCE price index report, the Fed’s preferred inflation measure, is expected to ease slightly to +2.5% y/y from December’s +2.6%, and the core index is expected to ease to +2.6% y/y from December’s +2.8%. The expected Jan PCE reports of +2.5% nominal and +2.6% core would leave those measures at or above their 3-3/4 year lows posted in 2024 of +2.1% and +2.6%, respectively, and well above the Fed’s +2% inflation target.
The markets are discounting the chances at 2% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
EUR/USD (^EURUSD) Wednesday fell by -0.30%, mainly due to the dollar’s strength. The euro also came under pressure Wednesday after the German Mar GfK consumer confidence index unexpectedly fell to an 11-month low. Wednesday’s decline in the 10-year German bund yield to a 1-1/2 week low has also weakened the euro’s interest rate differentials. In addition, the prospect of an increase in US tariffs on European goods is also undercutting the euro.
The German Mar GfK consumer confidence index unexpectedly fell -2.1 to an 11-month low of -24.7, weaker than expectations of an increase to -21.6.
Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at the March 6 policy meeting.
USD/JPY (^USDJPY) Wednesday fell by -0.06%. The yen on Wednesday recovered from early losses and moved higher after T-note yields tumbled when the 10-year T-note yield fell to a 2-1/2 month low. The yen is just below Tuesday’s 4-1/2 month high against the dollar.
The yen on Wednesday was initially under pressure after Japan’s Dec leading index CI was revised lower. Also, the 10-year Japan JGB bond yield Wednesday fell to a 2-week low of 1.320%, which was negative for the yen’s interest rate differentials.
The Japan Dec leading index CI was revised downward by -0.6 to 108.3 from the previously reported 108.9.
April gold (GCJ25) Wednesday closed up +11.80 (+0.40%), and March silver (SIH25) closed up +0.446 (+1.40%). Precious metals prices settled moderately higher on Wednesday as President Trump’s tariff threats boosted the safe-haven demand for precious metals. Also, lower global bond yields on Wednesday supported precious metals prices. Silver also has carryover support from Wednesday’s rally in copper prices to a 1-1/2 week high after President Trump signed an executive order Tuesday evening directing the Commerce Department to examine possible tariffs on US copper imports.
Gains in metals were limited Wednesday by a stronger dollar and hawkish comments from Atlanta Fed President Bostic, who said the Fed needs to keep interest rates in restrictive territory. Also, a decline in inflation expectations curbed demand for gold as an inflation hedge after Wednesday’s US 10-year breakeven inflation rate fell to a 7-week low.
