Dollar Rallies as Fed Rate Cut Hopes Fade

The dollar index (DXY00) on Monday climbed to a 2-1/2 month high and finished up by +0.53%.  Hawkish Fed comments Monday curbed expectations for Fed rate cuts and boosted the dollar.   The dollar added to its gains on Monday’s stronger-than-expected Jan ISM services index that pushed the 10-year T-note yield to a 1-week high.

Monday’s U.S. economic news was hawkish for Fed policy and bullish for the dollar.  The Jan ISM services index rose +2.9 to a 4-month high of 53.4, stronger than expectations of 52.0.  Also, the Jan ISM services prices paid sub-index unexpectedly rose +7.3 to an 11-month high of 64.0, stronger than expectations of a decline to 56.7.

Chicago Fed President Goolsbee said, "We need to see more data showing inflation progress" before the Fed starts lowering interest rates.

Minneapolis Fed President Kashkari said the neutral policy rate has possibly risen.  That "gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery." 

Fed Chair Powell said in an interview on Sunday evening's 60 Minutes show that the Fed is wary of cutting interest rates too soon and reiterated that a March rate cut is unlikely.

The markets are discounting the chances for a -25 bp rate cut at 16% for the March 19-20 FOMC meeting and at 74% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Monday tumbled to a 2-1/2 month low and finished down by -0.46%.  Dollar strength on Monday undercut the euro.  Also, economic concerns are weighing on the euro after German Dec exports declined by the most in a year.  In addition, the weaker-than-expected Eurozone PPI report was dovish for ECB policy and bearish for the euro. 

ECB Governing Council member Vujcic said the ECB "needs to have patience at the moment before getting into an easing cycle to make sure that wage costs aren't translating into sustained wage pressure."

The Eurozone Dec PPI fell -10.6% y/y, weaker than expectations of -10.5% y/y.

The Eurozone Feb Sentix investor confidence index rose +2.9 to a 10-month high of -12.9, stronger than expectations of -15.0.

German trade data was below expectations as Dec exports fell -4.6% m/m, weaker than expectations of -2.8% m/m and the biggest decline in a year.  Also, Dec imports fell -6.7% m/m, weaker than expectations of -1.9% m/m and the biggest decline in a year.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 13% for its next meeting on March 7 and 68% for the following meeting on April 11.

USD/JPY (^USDJPY) on Monday rose by +0.26%.  The yen on Monday extended last Friday’s losses to a 2-1/4 month low against the dollar.  Hawkish Fed comments Monday from Fed Chair Powell and Minneapolis Fed President Kashkari pushed T-note yields higher and weighed on the yen.  The yen found some support after the Japan Jan Jibun Bank services PMI was revised upward to a 4-month high.

The Japan Jan Jibun Bank services PMI was revised upward by +0.4 to 53.1 from the previously reported 52.7, the highest level in 4 months.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 20% for its next meeting on March 19 and 81% for the following meeting on April 26.

April gold (GCJ4) Monday closed -10.80 (-0.53%), and Mar silver (SIH24) closed -0.374 (-1.64%).  Precious metals on Monday closed moderately lower, with gold sliding to a 1-week low and silver falling to a 1-1/2 week low.  Monday’s rally in the dollar index to a 2-1/2 month high was bearish for metal prices.  Also, hawkish comments Monday from Fed Chair Powell, Minneapolis Fed President Kashkari, and Chicago Fed President Goolsbee weighed on precious metals.  Gold remains under pressure from ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low last Friday.

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