Dollar Slides With T-Note Yields

The dollar index (DXY00) on Tuesday fell by -0.26%.  A decline in T-note yields on Tuesday weighed on the dollar. Recent hawkish Fed comments and strong U.S. economic news have pushed back the chances of a Fed rate cut from the March FOMC meeting to the May meeting and are supportive of the dollar. 

Comments on Tuesday from Cleveland Fed President Mester were slightly hawkish and supportive of the dollar when she said she's not in a hurry to begin cutting interest rates and that policymakers will probably gain confidence to cut rates "later this year" if the economy evolves as expected.

The markets are discounting the chances for a -25 bp rate cut at 23% for the March 19-20 FOMC meeting and at 82% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Tuesday matched Monday’s 2-1/2 month low and finished up by +0.09%.  The dollar’s weakness on Tuesday supported the euro.  Also, strength in German factory orders was bullish for the euro after German Dec factory orders unexpectedly rose by the most in 3-1/2 years.   The euro Tuesday initially moved lower after Eurozone Dec retail sales fell more than expected and after the ECB’s Dec 1-year inflation expectations eased, dovish factors for ECB policy. 

Eurozone Dec retail sales fell -1.1% m/m, weaker than expectations of -1.0% m/m and the biggest decline in a year.

The ECB Dec 1-year inflation expectations eased to +3.2% from +3.5% in Nov, the slowest pace of increase in 1-3/4 years.  The Dec 3-year inflation expectations increased to +2.5 % from +2.4% in Nov.

German Dec factory orders unexpectedly rose +8.9% m/m, stronger than expectations of -0.2% m/m and the largest increase in 3-1/2 years.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 19% for its next meeting on March 7 and 74% for the following meeting on April 11.

USD/JPY (^USDJPY) on Tuesday fell by -0.50%.  The yen on Tuesday moved higher as lower T-note yields boosted the yen.  Gains in the yen were contained by weaker-than-expected Japanese economic news Tuesday on household spending and wages.

Japan Dec household spending fell -2.5% y/y, weaker than expectations of -2.0% y/y.

Japan Dec labor cash earnings rose +1.05 y/y, weaker than expectations of +1.4% y/y.  Also, Dec real cash earnings fell -1.9% y/y, weaker than expectations of -1.5% y/y.

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 77% for the following meeting on April 26.

April gold (GCJ4) Tuesday closed +8.50 (+0.42%), and Mar silver (SIH24) closed +0.056 (+0.25%).  Precious metals on Tuesday closed slightly higher.  A weaker dollar on Tuesday supported modest gains in metals. Also, a decline in global bond yields Tuesday was bullish for precious metals.  Silver garnered some support after German Dec factory orders unexpectedly rose by the most in 3-1/2 years, a sign of strength in industrial metals demand. Gains in precious metals were limited as recent hawkish Fed comments and stronger-than-expected U.S. economic news have pushed back expectations for the Fed to cut interest rates from March to May.  Also, gold is still weighed down from the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Monday. 

• Stocks Waver on Lower Bond Yields and Mixed Corporate Earnings
• Dollar Rallies as Fed Rate Cut Hopes Fade
• Stocks Fall as Bond Yields Jump on Hawkish Fed Comments and Strong ISM Services Report
• Dollar Jumps With T-Note Yields on Strong U.S. Job Growth

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