The dollar index (DXY00) on Tuesday rose to a 1-week high and finished up by +0.25%. Weakness in the euro and the British pound on Tuesday was supportive for the dollar after both currencies fell to 1-week lows. Also, hawkish Fed comments boosted the dollar on Tuesday after Chicago Fed President Austan Goolsbee warned that services inflation remains elevated and Fed Governor Michael Barr said it will likely be appropriate for the Fed to hold interest rates steady ”for some time.” The dollar fell back from its best level after stocks recovered from early losses and moved higher, reducing liquidity demand for the dollar.
The US Feb Empire manufacturing general business conditions survey fell -0.6 to 7.1, a smaller decline than expectations of 6.2.
The US Feb NAHB housing market index unexpectedly fell by -1 to a 5-month low of 36, weaker than expectations of an increase to 38.
Chicago Fed President Austan Goolsbee warned that services inflation remains elevated, but there is potential for more interest rate cuts this year if inflation continues to return to the Fed’s 2% target.
Fed Governor Michael Barr said, “Based on current conditions and data in hand, it will likely be appropriate to hold interest rates steady for some time as we assess incoming data, the evolving outlook, and the balance of risks.”
Swaps markets are discounting the odds at 7% for a -25 bp rate cut at the next policy meeting on March 17-18.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
EUR/USD (^EURUSD) fell to a 1-week low on Tuesday and finished down by -0.03%. The euro was under pressure Tuesday from the unexpected decline in the German Feb ZEW expectations of economic growth survey. Also, dollar strength on Tuesday weighed on the euro.
The German Feb ZEW expectations of economic growth survey unexpectedly fell -1.3 to 58.3, weaker than expectations of an increase to 65.2.
Swaps are discounting a 3% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.
USD/JPY (^USDJPY) on Tuesday fell by -0.12%. The yen recovered from early losses on Tuesday and moved higher. Hawkish comments on Tuesday from BOJ Board member Seiji Adachi were supportive of the yen when he said he favored a BOJ interest rate increase in April. Divergent central bank policies are also bullish for the yen, with the BOJ seen raising interest rates in the near term, while the Fed and ECB keep their rates steady or cut them.
The yen initially moved lower on Tuesday after Japanese government bond yields declined, with the 10-year JGB yield falling to a 5-week low of 2.126%, weakening the yen’s interest rate differentials. Also, Tuesday’s report showing a decline in the Dec tertiary industry index by the most in 9 months was bearish for the yen.
The Japan Dec tertiary industry index fell -0.5% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 9 months.
BOJ Board member Seiji Adachi said, “A BOJ rate hike in March would entail risk, as it would be based on expectations, not confirmation,” and the BOJ would likely raise interest rates in April when new economic data becomes available.
The markets are discounting a +13% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) on Tuesday closed down -140.50 (-2.78%), and March COMEX silver (SIH26) closed down -4.424 (-5.67%).
Gold and silver prices sold off sharply on Tuesday and posted 1-week lows. Tuesday’s rally in the dollar index to a 1-week high weighed on metals prices. Also, optimism that a nuclear deal between the US and Iran can be reached has reduced safe-haven demand and sparked a long liquidation in precious metals after Iran said it reached a “general agreement” with the US on a nuclear deal. Losses in precious metals accelerated on Tuesday amid hawkish Fed comments from Fed Governor Michael Barr, who said it will likely be appropriate for the Fed to hold interest rates steady ”for some time.”
Precious metals found some support on Tuesday from lower global bond yields. Also, safe-haven demand for precious metals is supporting prices amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela. In addition, US political uncertainty, large US deficits, and uncertainty regarding government policies are prompting investors to cut holdings of dollar assets and shift into precious metals.
Strong central bank demand for gold is also supportive of prices, following the recent news that bullion held in China’s PBOC reserves rose by +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves.
Finally, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC’s December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.
Gold and silver plunged from record highs on January 30 when President Trump announced he had nominated Keven Warsh as the new Fed Chair, which fueled massive liquidation of long positions in precious metals. Mr. Warsh is one of the more hawkish candidates for Fed Chair and is seen as less supportive of deep interest rate cuts. Also, recent volatility in precious metals prices has prompted trading exchanges worldwide to raise margin requirements for gold and silver, leading to the liquidation of long positions.
Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high on January 28. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 2.5-month low on February 2.
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. This article was originally published on Barchart.com
