The dollar index (DXY00) on Wednesday rose by +0.13%, adding to Tuesday’s gain of +0.45%. The dollar saw support from a fresh US tariff threat and from the hawkish FOMC minutes. However, the dollar was undercut by the -2 bp decline in the 10-year T-note yield.
The minutes from the Jan 28-29 FOMC meeting, released Wednesday afternoon, were hawkish since the minutes indicated that the FOMC has paused its rate-cut regime until inflation improves. The minutes said, “Participants indicated that, provided that the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.” The minutes also said, “many participants noted that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.” The FOMC at the Jan 28-29 meeting left its federal funds target range unchanged at 4.25-4.50%, standing pat after cutting the funds rate by a total of 100 bp in second half of 2024. The market is currently discounting a total rate cut of -37 bp by the end of 2025.
The markets are discounting the chances at 2% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
The dollar on Wednesday saw support from President Trump’s announcement of a new set of tariffs, which could be inflationary and hawkish for Fed policy. President Trump said Tuesday night that he will likely impose tariffs of around 25% on US auto, semiconductor, and pharmaceutical imports by April 2. Mr. Trump said the tariffs would be delayed until April 2 to give companies time to move production into the US so they would not be affected by the new import tariffs. These new tariffs would add to the previously announced 25% tariffs on steel and aluminum that take effect in March, and “reciprocal tariffs” on a country-by-country basis that will be calculated and take effect by April 1. Mr. Trump has also announced a 10% import tariff on US imports from China, and 25% tariffs on Canada and Mexico although those have been deferred until at least March 4.
US Jan housing starts fell -9.8% to 1.366 million, weaker than expectations for a decline to 1.390 million. That followed a revised +16.1 surge in December to 1.515 million units. Meanwhile, Jan building permits rose +0.1% to 1.483 million, stronger than expectations of a decline to 1.460 million.
EUR/USD (^EURUSD) on Wednesday fell by -0.19%. The euro was undercut by US tariff concerns after President Trump announced sector tariffs on autos, chips, and pharmaceuticals that could further weaken the Eurozone economy.
The euro had underlying support from hawkish comments released Wednesday by ECB Executive Board Member Isabel Schnabel, who suggested the ECB is nearing the point of pausing or halting its rate cuts. She said ECB officials at their next meeting, where the ECB is expected to cut rates by another -25 bp, should debate whether to drop the language from their post-meeting statement that implies leaning towards another rate cut.
The euro also had support from higher European bond yields seen this week, driven by ideas that European defense spending will need to rise sharply as Europe is increasingly forced to defend itself against Russian aggression as US-Russian relations thaw.
Swaps are discounting the chances at 97% for a -25 bp rate cut by the ECB at the March 6 policy meeting.
USD/JPY (^USDJPY) fell -0.37%. The yen saw underlying support from recent hawkish comments from top Japanese officials. Japanese Prime Minister Ishiba said last Thursday the Japanese economy is on its way to achieving sustainable inflation backed by wage growth, which increased the odds for rate hikes. The markets are currently discounting an overall +40 bp rise in the BOJ’s benchmark rate by year-end.
April gold (GCJ25) on Wednesday closed down -12.90 (-0.44%), and March silver (SIH25) closed down -0.330 (-0.99%). Gold prices were undercut by the hawkish FOMC minutes and by the mildly higher dollar. Wednesday’s weaker-than-expected US housing starts report was negative for silver and industrial metals prices.
Gold prices on Wednesday saw underlying support from Tuesday when Goldman Sachs lifted its year-end gold target to $3100 on central-bank demand and inflows into gold ETFs. Goldman said gold is also seeing support from economic policy uncertainty stemming from investor concern about tariffs.
