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Record High Stocks Weigh on the Dollar

Barchart - Fri Feb 23, 9:49AM CST

The dollar index (DXY00) this morning is slightly lower but remains above Thursday’s 3-week low.  The dollar is under pressure today from the rally in the S&P 500 to a new record high, which has curbed liquidity demand for the dollar.  Lower T-note yields today are also undercutting the dollar. 

The markets are discounting the chances for a -25 bp rate cut at 2% for the March 19-20 FOMC meeting and 25% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) this morning is down by -0.05%.  Today, the euro gave up an early advance and turned lower on dovish comments from ECB President Lagarde and ECB Governing Council member Centeno.   Lagarde said the latest Eurozone compensation numbers are “encouraging,” and Centeno said the ECB must be ready for an interest rate cut in March.

The euro today initially moved higher on hawkish comments from ECB Governing Council members Nagel and Simkus, who gave the euro a boost when they said they favored waiting before cutting interest rates.  An increase in ECB inflation expectations and the German Feb IFO business climate also supported EUR/USD. 

ECB Governing Council member Centeno said the ECB must be ready for an interest rate cut in March, even if not likely, as downside risks to inflation and growth have materialized.

ECB Governing Council member Simkus said, "I think that we'll see the positive developments on wages and inflation that would allow the ECB to move into the less restrictive area in the summer of 2024."

ECB Governing Council member and Bundesbank President Nagel said, "Even though it may be very tempting, it is too early for the ECB to cut interest rates because the price outlook is not yet clear enough."

The ECB's Feb 1-year inflation expectations rose +0.1 to 3.3% from 3.2% in Jan.  The Feb 3-year inflation expectations were unchanged from Jan at 2.5%, higher than expectations of a decline to 2.4%. 

The German Feb IFO business climate rose +0.3 to 85.5, right on expectations.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 4% for its next meeting on March 7 and 35% for the following meeting on April 11.

USD/JPY (^USDJPY) this morning is down by -0.08%.  The yen today recovered from a 1-week low against the dollar and is slightly higher.  Short covering emerged in the yen this morning after T-note yields declined. The yen was initially under pressure today as strength in stocks reduced safe-haven demand for the yen.  Today's trading activity in the yen may be muted with Japanese markets closed for the Emperor’s birthday holiday. 

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 29% for its next meeting on March 19 and 78% for the following meeting on April 26.

April gold (GCJ4) this morning is up +5.60 (+0.28%), and Mar silver (SIH24) is down -0.024 (-0.11%).  Precious metals this morning are mixed, with silver falling to a 1-week low.  A weaker dollar today is supportive of metals.  Also, lower global bond yields are bullish for precious metals.  In addition, the ongoing geopolitical risks in the Middle East and Ukraine have boosted safe-haven demand for precious metals. 

Limiting gains in precious metals today is strength in stocks that curbs safe-haven demand for precious metals.  Also, gold remains under pressure from the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Thursday.  The ongoing housing crisis in China is weighing on silver prices after China Jan new home prices fell -0.37% m/m, the eighth consecutive monthly decline and a bearish factor for industrial metals demand.



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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.

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