The dollar index (DXY00) on Wednesday rose +0.22%. The dollar recovered from early losses on Wednesday and edged higher after Iran said it had rejected the latest US peace proposal. Also, Wednesday’s economic news from the US, showing the February import price index ex-petroleum posting its biggest increase in 4 years, is hawkish for Fed policy and supports the dollar.
The dollar initially fell on Wednesday as stocks rallied after the Trump administration stepped up efforts to end the war with Iran and sent Iran a 15-point peace proposal to end hostilities. Also, Wednesday’s 2% drop in crude oil prices could curb price pressures and allow the Fed to continue cutting interest rates, a strong factor for the dollar.
US MBA mortgage applications fell -10.5% for the week ended March 20, the sub-prime mortgage index fell 5.4% and the sub-prime mortgage refinancing index fell 14.6%. The average 30-year mortgage rate rose +13 bp to 6.43% from 6.30% last week.
The US Feb ex-petroleum import price index rose +1.2% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 4 years.
Swaps markets are down 4% with a +25 bp rate hike at the April 28-29 FOMC meeting.
The dollar continues to be bullish on the poor outlook for interest rate differentials, with the FOMC expected to cut interest rates by at least -25 bp in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bp in 2026.
EUR/USD (^EURUSD) on Wednesday fell by -0.38%. The euro was under pressure on Wednesday as business confidence fell in Germany after Germany’s Mar IFO business outlook fell to a 13-month low. Also, strong comments from ECB President Lagarde weighed down the euro when she said the ECB could consider a short-term energy shock caused by the Iran war.
German business climate Mar IFO fell -2.0 to a 13-month low of 86.4.
ECB President Lagarde said it was too early to determine a response to the war and “we will not act before we have sufficient information on the size and persistence of the shock and its spread.” He added that the initial shock would be smaller than in 2022, given the favorable economic background.
Swaps discount a 62% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.
USD/JPY (^USDJPY) on Wednesday rose +0.48%. The yen fell on Wednesday after Japan’s leading index, the CI, was revised lower. Also, hopes of an end to the war in Iran caused a +2% rally in the Nikkei Stock Index on Wednesday, cutting off the safe haven demand of the yen.
The yen’s losses were limited on Wednesday amid a slide in T-note yields and a 2% drop in crude oil prices. Also, hawkish comments by a BOJ board member in the minutes of the January 30 BOJ meeting were supportive of the yen.
Japan’s leading Jan index CI was revised down by -0.3 to 112.1 from 112.4 previously reported.
According to the minutes of the BOJ’s January 30 meeting, one policymaker said that the weak yen and high long-term interest rates largely reflected fundamentals, and the only prescription was for the BOJ to raise the policy interest rate in a timely and appropriate manner.
Markets are discounting a +59% BOJ rate hike of 25 bp at the next meeting on April 28.
April COMEX gold (GCJ26) on Wednesday closed +150.30 (+3.41%), while May COMEX silver (SIK26) closed +3.072 (+4.42%).
Gold and silver prices rose sharply on Wednesday as crude oil prices fell more than 2% after the US unveiled a 15-point peace plan to end the war with Iran. Falling crude oil prices may keep inflation in check and is contrary to central bank policy and supportive of precious metals. Lower global bond yields on Wednesday also weighed on precious metals.
Precious metals also have safe-haven support amid concerns about an escalation of war in the Middle East. Saudi Arabia agreed to give US troops access to King Fahd Air Base, while the UAE closed an Iranian-owned hospital and club. Iran’s neighbors in the Middle East are growing frustrated with Iran, which has responded to US and Israeli attacks by striking targets in several nearby countries.
Precious metals continue to see strong safe-haven demand amid the Iran war, which has entered its 25th day. Also, uncertainty about US taxes, US political turmoil, large US deficit, and uncertainty of government policy are increasing the demand for precious metals as a store of value.
The latest fund liquidation of precious metals is a bull on prices, as long holdings in gold ETFs fell to a 3.25-month low on Tuesday after hitting a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 6.25-month low last Friday after hitting a 3.5-year high on December 23.
Strong central bank demand for gold is supporting gold prices, following recent news that China’s PBOC’s PBOC reserves increased by +40,000 to 74.19 million troy ounces in January, the fifteenth month in a row that the PBOC has increased its gold reserves.
As of the date of publication, Rich Asplund did not have (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
