Dollar Soars on Fed Divergence and Increased Liquidity Demand as Stocks Fall

Rich Asplund - Barchart - Fri Apr 12, 9:34AM CDT

The dollar index (DXY00) this morning is up by +0.71% at a 5-1/4 month high. The divergence between the Fed and ECB is boosting the dollar and undercutting the euro, with the Fed expected to delay interest rate cuts and the ECB expected to begin cutting rates in June. Also, hawkish comments today from Boston Fed President Collins supported the dollar when she said the strength of the US economy allows time for patience from the Fed. In addition, war jitters in the Middle East have hammered stocks today and increased liquidity demand for the dollar.

The US Mar import price index ex-petroleum was unchanged m/m, weaker than expectations of +0.1% m/m.

The University of Michigan US Apr consumer sentiment index fell -1.5 to 77.9, weaker than expectations of 79.0.

The University of Michigan US Apr 1-year inflation expectations unexpectedly rose +0.2 to 3.1%, higher than expectations of no change at 2.9%. Also, the Apr 5-10 year inflation expectations rose +0.2 to 3.0%, higher than expectations of no change at 2.8%.

Boston Fed President Collins said the strength of the US economy allows time for patience from the Fed, and she is looking into two Fed rate cuts this year.

The markets are discounting the chances for a -25 bp rate cut at 6% for the next FOMC meeting on April 30-May 1 and 29% for the following meeting on June 11-12.

EUR/USD (^EURUSD) today fell to a 5-1/4 month low and is down by -0.95%. Today, the dollar's strength is undercutting the euro on divergence between the Fed and ECB, with the Fed expected to delay rate cuts and the ECB expected to start cutting rates in June. Also, dovish comments today from ECB Governing Council members Kazaks, Stournaras, and Muller weighed on the euro when they said they expect ECB rate cuts to begin in June.

ECB Governing Council member Kazaks said, "If really nothing changes, then June will be the month where we see the first rate cut" by the ECB.

ECB Governing Council member Muller said, "The ever-decelerating general price increase in the Eurozone increases the likelihood" of an ECB rate cut in June.

ECB Governing Council member Stournaras said the ECB shouldn't be afraid to shift its "overly prudent" stance on interest rates away from that of the Federal Reserve and "now is the time to diverge."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 93% for its next meeting on June 6 and fully priced in (+144%) that rate cut for the following meeting on July 18.

USD/JPY (^USDJPY) this morning is down by -0.23%. The yen today rebounded from a 33-year low against the dollar and is moderately higher. Today’s decline in T-note yields has sparked short covering in the yen. The yen also rose on speculation that Japanese authorities might soon intervene in the currency market to support the yen after Japanese Finance Minister Suzuki reiterated that the government would take an appropriate response if currency moves were excessive.

Japan Feb industrial production was revised downward by -0.5 to -0.6% m/m from the previously reported -0.1% m/m.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 1% for the April 26 meeting and 30% for the following meeting on June 14.

June gold (GCM4) this morning is up +58.0 (+2.44%), and May silver (SIK24) is up +1.385 (+4.90%). Precious metals today are sharply higher, with Jun gold posting a contract high and nearest-futures April gold at an all-time high. Silver prices also rose to a 3-year high.

Escalating Middle East tensions and stock market weakness are fueling safe-haven demand for precious metals today. The US and its allies believe a major missile or drone attack by Iran or its proxies is imminent against Israeli assets in retaliation for an Israeli attack on an Iranian embassy compound in Syria. Also, lower global bond yields today are supportive of precious metals. Silver prices also have carryover support from today’s rally in copper prices to a 1-3/4 year high. Finally, dovish comments from ECB Governing Council members Kazaks, Stournaras, and Muller sparked demand for gold as a store of value when they said they expect ECB rate cuts to begin in June.

Today, dollar strength is negative for metals as the dollar index jumped to a 5-1/4 month high. Also, hawkish comments today from Boston Fed President Collins were bearish for precious metals when she said the strength of the US economy allows time for patience from the Fed.

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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.