The dollar index (DXY00) on Wednesday rose by +0.27%. Wednesday’s better-than-expected US economic news on Mar housing starts and Mar core capital goods new orders supported gains in the dollar. Also, Wednesday’s +6% jump in crude oil prices increases inflation expectations, a hawkish factor for Fed policy, and a positive factor for the dollar.
The dollar raced to its highs on Wednesday afternoon after three FOMC members dissented in favor of no easing bias in the FOMC ‘s decision to keep policy unchanged. Also, hawkish comments from Fed Chair Powell support the dollar, as he said a bit of monetary policy restraint is the right place to be.
Heightened US-Iran tensions are boosting demand for the dollar as a safe-haven. The US and Iran are locked in a battle for control of the Strait of Hormuz, with both sides blocking the waterway to gain leverage during an extended ceasefire. The Wall Street Journal reported that President Trump told his aides to prepare for an extended blockade and that it carries less of a risk for the US than resuming hostilities or walking away from the conflict without securing a deal that curbs Iran’s nuclear activities.
US Mar housing starts unexpectedly rose +10.8% m/m to a 15-month high of 1.502 million, stronger than expectations of a decline to 1.380 million. Mar building permits, a proxy for future construction, fell -10.8% m/m to a 7-month low of 1.372 million, weaker than expectations of 1.390 million.
US Mar capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, rose +3.3% m/m, stronger than expectations of +0.5% m/m and the largest increase in 5.75 years.
As expected, the FOMC kept the fed funds target rate unchanged at 3.50% to 3.75%. The vote was 8-4 in favor of the decision, with Fed Governor Miran dissenting in favor of a -25 bp rate cut. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan said they “supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.”
The post-FOMC meeting statement said, “Developments in the Middle East are contributing to a high level of uncertainty.” Also, “job gains have remained low, on average,” and the jobless rate “has been little changed in recent months, while inflation “is elevated, in part reflecting the recent increase in global energy prices.”
Fed Chair Powell said policymakers think the policy stance is in a very good place to wait, as inflation is kind of misbehaving, and maybe a little bit of restriction in monetary policy is the right place to be.
Swaps markets are discounting the odds at 0% for a 25 bp rate hike or a rate cut at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Wednesday fell to a 2-week low and finished down by -0.32%. The dollar’s strength on Wednesday weighed on the euro. Also, the larger-than-expected decline in Eurozone Apr economic confidence to a nearly 5.5-year low was bearish for the euro. In addition, weaker-than-expected German Apr CPI is dovish for ECB policy and negative for the euro. Finally, Wednesday’s +6% surge in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs.
Eurozone Apr economic confidence fell -3.2 to a nearly 5.5-year low of 93.0, weaker than expectations of 95.1.
Eurozone Mar M3 money supply rose +3.2% y/y, stronger than expectations of +3.1% y/y.
German Apr CPI (EU harmonized) rose +0.5% m/m and +2.9% y/y, weaker than expectations of +0.8% m/m and +3.1% y/y.
Swaps are discounting a 14% chance of a +25 bp rate hike by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Wednesday rose by +0.46%. The yen fell to a 4-week low against the dollar on Wednesday. Higher T-note yields on Wednesday undercut the yen. Also, Wednesday’s +6% jump in crude oil prices is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs. Trading activity was below normal on Wednesday, as markets in Japan were closed for the Showa Day holiday.
The markets are discounting a +47% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.
June COMEX gold (GCM26) on Wednesday closed down -46.90 (-1.02%), and May COMEX silver (SIK26) closed down -1.650 (-2.25%).
Gold and silver prices extended Tuesday’s sharp losses on Wednesday, with gold posting a 4-week low and silver posting a 3-week low. Wednesday’s stronger dollar and higher global bond yields weighed on metals prices. Also, Wednesday’s +6% surge in crude oil prices, driven by the ongoing closure of the Strait of Hormuz, raises inflation expectations and may prompt the world’s central banks to pursue tighter monetary policies, a bearish factor for precious metals.
Heightened Middle East tensions are positive for safe-haven demand of precious metals as both the US and Iran are maintaining blockades of the Strait of Hormuz. Precious metals also remain supported by uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty, which are boosting demand for precious metals as a store of value.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 4.5-month low on March 31 after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to an 8.25-month low last Friday after rising to a 3.5-year high on December 23.
Strong central bank demand for gold is supportive of gold prices, following the recent news that bullion held in China’s PBOC reserves rose by +160,000 ounces to 74.38 million troy ounces in March, the seventeenth consecutive month the PBOC has boosted its gold reserves.
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.
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