Rising Stock Prices Weigh on the Dollar

The dollar index (DXY00) on Wednesday fell by -0.15%.  The dollar on Wednesday posted modest losses.  Strength in stocks Wednesday curbed liquidity demand for the dollar. Also, Wednesday’s reports that showed a wider-than-expected U.S. Dec trade deficit and a smaller-than-expected increase in Dec consumer credit were bearish for the dollar.  Losses in the dollar were limited by hawkish comments from several Fed members that suggest the Fed is in no hurry to cut interest rates. 

Wednesday’s U.S. economic reports were bearish for the dollar.  The Dec trade deficit widened to -$62.2 billion, a larger deficit than expectations of -$62.0 billion.  Also, Dec consumer credit increased by +$1.561 billion, weaker than expectations of +$16.000 billion and the smallest increase in 4 months.

Fed comments on Wednesday were hawkish for policy and supportive of the dollar.  Richmond Fed President Barkin said he is "very supportive" of the Fed's patient stance toward determining when to begin easing monetary policy.  Also, Boston Fed President Collins said she's looking for more evidence that inflation is on a sustainable path toward the Fed's 2% target before cutting interest rates "later this year."  In addition, Minneapolis Fed President Kashkari said, "We can take time to assess data before cutting interest rates," and he sees two to three 25 bp rate cuts this year as appropriate right now.

The markets are discounting the chances for a -25 bp rate cut at 21% for the March 19-20 FOMC meeting and at 83% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Wednesday rose by +0.16%.  A weaker dollar Wednesday and hawkish ECB comments supported moderate gains in the euro.   ECB Executive Board member Schnabel warned against the ECB cutting interest rates too soon.  Gains in the euro were limited after German Dec industrial production fell more than expected by the most in 9 months.

ECB Executive Board member Schnabel said that because of sticky services inflation, a resilient labor market, a notable loosening of financial conditions, and tensions in the Red Sea, "this cautions against adjusting the policy stance too soon."

German Dec industrial production fell -1.6% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 9 months.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 12% for its next meeting on March 7 and 64% for the following meeting on April 11.

USD/JPY (^USDJPY) on Wednesday rose by +0.14%.  Higher T-note yields on Wednesday undercut the yen. The yen was also under pressure due to weaker interest rate differentials as the Fed, ECB, and BOE have all raised interest rates while the BOJ maintains its negative interest rate policy.   Better-than-expected Japanese economic news limited losses in the yen after the Dec leading index CI rose more than expected to a 14-month high.

The Japan Dec leading index CI rose +1.9 to a 14-month high of 110.0, stronger than expectations of 109.3.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 16% for its next meeting on March 19 and 77% for the following meeting on April 26.

April gold (GCJ4) Wednesday closed +0.30 (+0.01%), and Mar silver (SIH24) closed -0.118 (-0.52%).  Precious metals on Wednesday settled mixed, with silver falling to a 2-week low. A weaker dollar on Wednesday was supportive for metals.  Gold also garnered some safe-haven demand on concern about the health of U.S. regional bank stocks after Moody’s Investors Service cut the credit rating of New York Community Bancorp to junk. 

Gains in precious metals were limited due to hawkish central bank comments.  Minneapolis Fed President Kashkari and Boston Fed President Collins said the Fed could take its time before cutting interest rates, while ECB Executive Board member Schnabel warned against cutting rates too soon.  Silver prices were under pressure after German Dec industrial production fell by the most in 9 months, a bearish factor for industrial metals demand.  Gold also remains under pressure from the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Tuesday. 

• S&P 500 and Nasdaq 100 Climb to Record Highs on U.S. Economic Optimism
• Dollar Slides With T-Note Yields
• Stocks Waver on Lower Bond Yields and Mixed Corporate Earnings
• Dollar Rallies as Fed Rate Cut Hopes Fade

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