Dollar Falls on Speculation Fed May Soon Pause Rate Hikes

Rich Asplund - Barchart - Wed Jan 25, 2023

The dollar index (DXY00) on Wednesday fell by -0.27%. The dollar Wednesday gave up an early advance and moved mildly lower on speculation the Fed will soon pause its rate hike campaign after the Bank of Canada raised interest rates by +25 bp and announced it will pause its rate hikes to weigh the impact of prior tightening. The dollar Wednesday initially moved higher on increased liquidity demand after stocks retreated.

EUR/USD (^EURUSD) on Wednesday rose by +0.23% and is just below Monday’s 9-month high. The euro Wednesday found support from the better-than-expected German Jan Ifo report and hawkish comments from ECB Governing Council member Makhlouf. EUR/USD briefly fell into negative territory in concerns about escalation of the Ukraine-Russian war after Germany announced that it would supply Ukraine with over 100 Leopard battle tanks and the U.S. said it would provide tanks as well.

ECB Governing Council member Makhlouf said, "inflation remains far too high, and interest rates will have to rise significantly at a steady pace to reach levels sufficiently restrictive to ensure a timely return of inflation to the ECB's 2% medium-term target."

The German Jan Ifo business expectations index rose +3.2 to an 8-month high of 86.4, stronger than expectations of 85.3.

USD/JPY (^USDJPY) on Wednesday fell by -0.41%. A weaker dollar Wednesday supported moderate gains in the yen. Also, a jump in the 10-year Japan JGB bond yield Wednesday to a 1-week high of 0.447% strengthened the yen’s interest rate differentials and was bullish for the yen.

Wednesday’s Japanese economic news was bearish for the yen after the Nov leading index CI was revised down by -0.2 points to a 2-year low of 97.4 from the initially reported 97.6.

February gold (GCG3) on Wednesday closed up +7.20 (+0.37%), and March silver (SIH23) closed up +0.192 (+0.81%). Precious metals Wednesday posted moderate gains. A weaker dollar Wednesday was bullish for metals. Also, Germany’s decision to supply Ukraine with battle tanks sparked some safe-haven demand for precious metals. Gains in gold were limited by hawkish ECB comments Wednesday from ECB Governing Council member Makhlouf who said, "inflation remains far too high, and interest rates will have to rise significantly.”

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.