The dollar index (DXY00) rallied to a 1-week high on Wednesday and finished up by +0.57%. The dollar moved higher on Wednesday and found support on better-than-expected US economic reports on Dec capital goods new orders, Dec housing starts and building permits, and Jan manufacturing production. Also, higher T-note yields on Wednesday have strengthened the dollar’s interest rate differentials. Gains in the dollar accelerated on Wednesday on the hawkish minutes of the Jan 27-28 FOMC meeting, after “several” officials suggested the Fed may need to raise interest rates if inflation stays above its goal.
US MBA mortgage applications rose +2.8% in the week ended February 13, with the purchase mortgage sub-index down -2.7% and the refinancing mortgage sub-index up +7.1%. The average 30-year fixed rate mortgage fell -4 bp to 6.17% from 6.21% in the prior week.
US Dec capital goods new orders nondefense ex-aircraft and parts (a proxy for capital spending) rose +0.6% m/m, stronger than expectations of +0.3% m/m.
US Dec housing starts rose +6.2% m/m to a 5-month high of 1.404 million, stronger than expectations of 1.304 million. Dec building permits (a proxy for future construction) rose +4.2% m/m to a 9-month high of 1.448 million, stronger than expectations of 1.400 million.
US Jan manufacturing production rose +0.6% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 11 months.
The minutes of the Jan 27-28 FOMC meeting were hawkish as “Several participants indicated that they would have supported a two-sided description of the FOMC’s future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.”
Swaps markets are discounting the odds at 6% 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 1.5-week low on Wednesday and finished down -0.60%. The dollar’s strength on Wednesday weighed on the euro. Losses in the euro accelerated on Wednesday after the Financial Times reported that ECB President Christine Lagarde will step down from the central bank before her term expires in October 2027.
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 Wednesday rose by +0.97%. The yen tumbled to a 1-week low against the dollar on Wednesday after the Nikkei Stock Index rose by more than +1%, curbing safe-haven demand for the yen. Also, dollar strength and higher T-note yields on Wednesday undercut the yen.
Divergent central bank policies are supportive of 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.
Japanese trade news was mixed for the yen. Jan exports rose +16.8% y/y, stronger than expectations of +13.0% y/y and the most in three years. Jan imports unexpectedly fell -2.5% y/y versus expectations of +3.5% y/y and the biggest decline in five months.
The markets are discounting a +12% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) on Wednesday closed up by +103.60 (+2.11%), and March COMEX silver (SIH26) closed up +4.058 (+5.52%).
Gold and silver prices rallied sharply on Wednesday, recovering most of Tuesday’s sharp losses. 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. Also, 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. Precious metals prices fell from their best levels on Wednesday after the dollar index rallied to a 1-week high.
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
