The dollar index (DXY00) on Thursday rose by +0.51% and posted a 3.5-month high. Thursday’s stock slump boosted liquidity demand for the dollar. Also, higher T-note yields on Thursday have strengthened the dollar’s interest rate differentials. Thursday’s US economic news was mostly supportive for the dollar as weekly jobless claims rose less than expected and the Jan trade deficit narrowed more than expected, while Jan housing starts unexpectedly rose to an 11-month high.
US weekly initial unemployment claims fell -1,000 to 213,000, showing a stronger labor market than expectations of an increase to 215,000.
US Jan housing starts unexpectedly rose +7.2% m/m to an 11-month high of 1.487 million, stronger than expectations of a decline to 1.341 million. Jan building permits, a proxy for future construction, fell -5.4% m/m to a 5-month low of 1.376 million, weaker than expectations of 1.410 million.
The US Jan trade deficit shrank to -$54.5 billion, narrower than expectations of -$66.0 billion.
Swaps markets are discounting the odds at 1% for a -25 bp rate cut at the next FOMC policy meeting on March 17-18.
The dollar continues to be undercut by a 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 Thursday fell by -0.45% due to dollar strength. Also, the euro was undercut by Thursday’s comments from the European Union’s economy chief, Valdis Dombrovskis, who said the inflation rate could surpass 3% this year and GDP in the Eurozone could be as much as -0.4 points lower if the war in the Middle East causes crude oil prices to remain around $100 per barrel and gas prices stay elevated for an extended period.
Swaps are discounting a 3% chance of a +25 bp rate hike by the ECB at its next policy meeting on March 19.
USD/JPY (^USDJPY) on Thursday rose by +0.30%. The yen tumbled to an 8-week low against the dollar on Thursday due to surging crude prices, which are negative for Japan’s economy. Thursday’s higher T-note yields were also bearish for the yen. Losses in the yen were limited on Thursday following comments from BOJ Governor Ueda, who said forex is a key factor affecting prices and tends to affect inflation more than before.
