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Dollar Falls Back on Dovish Fed Comments

Barchart - Wed Feb 14, 2:35PM CST

The dollar index (DXY00) on Wednesday fell by -0.23%.  The dollar on Wednesday fell back from a 3-month high and posted moderate losses.  The dollar came under pressure after bond yields fell on dovish comments from Chicago Fed President Goolsbee.  Also, Wednesday’s rally in stocks has curbed liquidity demand for the dollar.

Chicago Fed President Goolsbee said, "Even if inflation comes in a bit higher for a few months, it would still be consistent with our path back to target."  He added that the Fed's current policy stance is "quite restrictive" and said, "I don't support waiting until inflation on a 12-month basis has already achieved 2% to begin cutting interest rates."

The markets are discounting the chances for a -25 bp rate cut at 14% for the March 19-20 FOMC meeting and at 46% for the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Wednesday rose by +0.16%.  The euro on Wednesday recovered from a 3-month low and turned higher on better-than-expected economic news and hawkish ECB comments.  Eurozone Dec industrial production unexpectedly rose at the fastest pace in 16 months, and ECB Vice President Guindos said it would take time before inflation in the Eurozone returns to its 2% target.  Gains in the euro were limited after ECB Governing Council member Makhlouf said he expects stagnation for the Eurozone economy in the short term. 

Eurozone Dec industrial production unexpectedly rose +2.6% m/m, stronger than expectations of -0.2% m/m and the biggest increase in 16 months.

ECB Vice President Guindos said, "It will take some time before we have the necessary information to confirm that inflation is sustainably returning to our 2% target."

ECB Governing Council member Makhlouf said, "The short-term outlook for the Eurozone economy points to stagnation in the face of tighter financing conditions, weak business and consumer confidence, and low foreign demand."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 8% for its next meeting on March 7 and 55% for the following meeting on April 11.

USD/JPY (^USDJPY) on Wednesday fell by -0.17%.  The yen strengthened Wednesday after Japanese authorities expressed displeasure with Tuesday ‘s slump in the yen to a 2-3/4 month low against the dollar.  Japan’s top currency chief, Kanda, and finance minister, Suzuki, warned that authorities stand ready to take steps in the forex market if excessive moves in the yen are seen.  Lower T-note yields on Wednesday were also supportive of the yen. 

Japan’s top currency chief Masato Kanda, vice finance minister for international affairs, said, “Recent moves by the yen have been pretty rapid, and authorities are on call 24 hours a day, 365 days a year, and will take appropriate steps as needed.” 

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 32% for its next meeting on March 19 and 68% for the following meeting on April 26.

April gold (GCJ4) Wednesday closed -2.90 (-0.14%), and Mar silver (SIH24) closed +0.233 (+1.05%).  Precious metals on Wednesday settled mixed, with gold falling to a 2-month low.  Gold prices extended Tuesday’s losses on negative carryover from the stronger-than-expected U.S. Jan CPI report that dampened expectations for Fed rate cuts in the first half of the year.  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. 

A weaker dollar on Wednesday and lower global bond yields supported precious metals.  Silver also garnered support Wednesday after Eurozone Dec industrial production unexpectedly rose at the fastest pace in 16 months, a positive factor for industrial metals demand.  Gold also has support as an inflation hedge after the U.S. 10-year breakeven inflation rate on Wednesday rose to a 3-week high. 

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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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