The dollar index (DXY00) Wednesday rose by +0.15%. The dollar on Wednesday finished moderately higher due to concern that the escalation of the trade war would boost inflation and keep Fed policy restrictive after US tariffs on steel and aluminum went into effect, and the EU and Canada retaliated by imposing tariffs on some US goods. Gains in the dollar were limited after US Feb CPI rose less than expected, a dovish factor for Fed policy. Also, the strength in stocks Wednesday reduced liquidity demand for the dollar.
US Feb CPI rose +0.2% m/m and +2.8% y/y, weaker than expectations of +0.3% /m and +2.9% y/y. Feb CPI ex-food and energy rose +0.2% m/m and +3.1% y/y, weaker than expectations of +0.3% m/m and +3.2% y/y, with the +3.1% y/y gain the smallest year-on-year increase in 3-3/4 years.
Market attention this week will focus on US trade policies as 25% tariffs on US imports of steel and aluminum took effect today. On Thursday, the Feb final-demand PPI is expected to ease to +3.2% y/y from +3.5% y/y in Jan. On Friday, the University of Michigan’s March consumer sentiment index is expected to fall -1.2 to 63.5. Finally, the markets will also see if Congress can approve a spending bill to avert a government shutdown ahead of a March 15 deadline.
The markets are discounting the chances at 1% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
EUR/USD (^EURUSD) Wednesday fell by -0.27%. Wednesday’s stronger dollar weighed on the euro. Also, dovish comments on Wednesday from ECB Governing Council member Centeno undercut the euro when he said the ECB shouldn’t wait to lower interest rates. Losses in the euro were limited after the 10-year German bund yield jumped to a 16-month high and after the EU retaliated against US tariffs by imposing some tariffs on US goods. Also, ECB President Lagarde warned that the ECB’s job in combating inflation has become harder.
The European Union today imposed tariffs on up to $28.3 billion of US goods, including soybeans, beef and poultry, in retaliation for US tariffs on steel and aluminum imports.
ECB President Lagarde said that abrupt shifts in global trade and higher Eurozone defense spending will make it harder to keep inflation stable.
ECB Governing Council member Centeno said the ECB shouldn’t wait to lower interest rates and, “I would prefer to move sooner rather than later.”
Swaps are discounting the chances at 44% for a -25 bp rate cut by the ECB at the April 17 policy meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.35%. The yen retreated Wednesday after Japanese economic news showed Japan Feb PPI eased and the Q1 BSI large all-industry business conditions fell, dovish factors for BOJ policy. Also, Wednesday’s rebound in stocks curbed safe-haven demand for the yen. Losses in the yen accelerated on Wednesday as T-note yields rose.
Japan Feb PPI eased to +4.0% y/y from +4.2% y/y in Jan, right on expectations.
Japan Q1 BSI large all-industry business conditions eased to 2.0 from 5.7 in Q4.
April gold (GCJ25) Wednesday closed up +25.90 (+0.89%), and May silver (SIK25) closed up +0.596 (+1.80%). Precious metals prices posted moderate gains Wednesday, with gold climbing to a 2-week high and silver climbing to a 2-1/2 week high. The escalation of trade tensions is boosting safe-haven demand for precious metals. US tariffs of 25% went into effect Wednesday on imports of steel and aluminum, and the EU and Canada retaliated by imposing their tariffs on some US goods. Also, Wednesday’s weaker-than-expected US Feb CPI report is dovish for Fed policy and supports precious metals. Gold also has support on fund buying as long gold positions in ETFs rose to a 15-month high Tuesday. Silver has carryover support Wednesday from the rally in copper prices to a 9-1/2 month high.
Wednesday’s rally in the dollar limited gains in precious metals. Also, higher global bond yields on Wednesday were negative for precious metals. In addition, Wednesday’s stock rally has reduced safe-haven demand for precious metals.
