Dollar Follows T-Note Yields Lower

The dollar index (DXY00) on Thursday fell by -0.23%.  The dollar on Thursday gave up an early advance and turned lower after a plunge in T-note yields sparked some selling of the dollar.  The dollar was also weighed down by Fed-friendly U.S. economic reports on weekly jobless claims and Q4 nonfarm productivity. The dollar Thursday initially moved higher on positive carryover from Wednesday afternoon when Fed Chair Powel said he doesn’t think it is likely the Fed will cut rates in March.

Thursday’s U.S. economic news mixed for the dollar.  On the bearish side, weekly initial unemployment claims unexpectedly rose +9,000 to a 2-1/2 month high of 224,000, showing a weaker labor market than expectations of a decline to 212,000.  Also, Q4 nonfarm productivity rose +3.2%, stronger than expectations of +2.5%.  Conversely, the Jan ISM manufacturing index unexpectedly rose +2.0 to a 15-month high of 49.1, stronger than expectations of a decline to 47.2.  Also, Dec construction spending rose +0.9% m/m, stronger than expectations of +0.5% m/m.

The markets are discounting the chances for a -25 bp rate cut at 40% for the March 19-20 FOMC meeting and have more than fully discounted (137%) that -25 bp rate cut by the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Thursday rose by +0.49%.  The euro on Thursday recovered from a 7-week low and finished moderately higher.  The euro rebounded Thursday after Eurozone Jan consumer prices rose more than expected, a hawkish factor for ECB policy.  Weakness in the dollar also supported the upside in the euro.

The Eurozone Jan CPI eased to +2.8% y/y from +2.9% y/y in Dec, stronger than expectations of +2.7% y/y. Jan core CPI eased to +3.3% y/y from +3.4% y/y in Dec, stronger than expectations of +3.2% y/y.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 17% for its next meeting on March 7 and 94% for that same rate cut at the following meeting on April 11.

USD/JPY (^USDJPY) on Thursday fell by -0.42%.  The yen on Thursday rallied for a second day and posted a 2-week high against the dollar.  The yen found support Thursday on comments from the leader of UA Zensen, one of Japan’s largest unions, who said he would push for pay raises above 6%, which would boost wage pressures and is a hawkish factor that could enable the BOJ to raise interest rates.  The yen extended its gains after the 10-year T-note yield fell to a 5-week low, a supportive factor for the yen. 

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 24% for its next meeting on March 19 and at 76% for the following meeting on April 26.

April gold (GCJ4) Thursday closed +3.70 (+0.18%), and Mar silver (SIH24) closed +0.067 (+0.29%).  Precious metals on Thursday recovered from early losses and posted modest gains. A weaker dollar Thursday sparked short covering in metals.  Precious metals also garnered support Thursday after U.S. weekly initial unemployment claims unexpectedly rose to a 2-1/2 month high, and after Q4 nonfarm productivity rose more than expected, dovish factors for Fed policy.  Silver also found support after the Jan ISM manufacturing index unexpectedly rose to a 15-month high, a positive factor for industrial metals demand.

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