Dollar Climbs on Higher Bond Yields and Weak Stocks

Rich Asplund - Barchart - Thu Apr 11, 9:46AM CDT

The dollar index (DXY00) this morning extended Wednesday’s sharp rally to a 4-3/4 month high and is up by +0.16%. Higher T-note yields today are supporting the dollar as the 10-year T-note yield rose to a 4-3/4 month high. Also, US weekly initial unemployment claims fell more than expected to a 5-week low, a sign of labor market strength that is hawkish for Fed policy. In addition, weakness in stocks today has boosted liquidity demand for the dollar.

Gains in the dollar are limited after today’s US Mar PPI report rose less than expected, a dovish factor for Fed policy. Also, dovish comments today from New York Fed President Williams pressured the dollar when he said if the economy proceeds as expected, the Fed will begin to ease policy this year.

US Mar PPI final demand rose +0.2% m/m and +2.1% y/y, slightly weaker than expectations of +0.3% m/m and +2.2% y/y. However, Mar PPI ex-food and energy accelerated to +2.4% y/y from +2.0% y/y in Feb, slightly stronger than expectations of +2.3% y/y and the largest increase in 7 months.

US weekly initial unemployment claims fell -11,000 to a 5-week low of 211,000, showing a stronger labor market than expectations of 215,000.

New York Fed President Williams said the economic projections issued at the Fed's March meeting "indicate that if the economy proceeds as expected, it will make sense to dial back the policy restraint gradually over time, starting this year."

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 23% for the following meeting on June 11-12.

EUR/USD (^EURUSD) today fell to an 8-week low and is down by -0.33%. The euro came under pressure today after the ECB signaled it would begin to cut interest rates soon if inflation continues to fall. Also, comments today from ECB President Lagarde weighed on the euro when she said risks to the growth outlook are tilted to the downside.

The ECB, as expected, kept its deposit facility rate unchanged at 4.00% and said, "If the Governing Council's updated assessment of the inflation outlook were to further increase confidence that inflation is converging to the 2% target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction."

ECB President Lagarde said risks to the growth outlook are tilted to the downside, and inflation will fluctuate and then decline to the ECB's target.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 77% for its next meeting on June 6 and fully priced in (+117%) that rate cut for the following meeting on July 18.

USD/JPY (^USDJPY) today is up by +0.05%. The yen today fell to a fresh 33-year low against the dollar. Strength in T-note yields is undercutting the yen after the 10-year T-note yield today rose to a 4-3/4 month high. Weakness in the yen is limited by speculation that Japanese authorities might soon intervene in the currency market to support the yen after Japan's top currency official, Vice Finance Minister for International Affairs Kanda, said authorities will consider "all their options for the foreign exchange market" and are ready to respond to any event. Today’s jump in the 10-year JGB bond yield to a 4-3/4 month high of 0.871% is also supportive of the yen.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 32% for the following meeting on June 14.

June gold (GCM4) this morning is up +11.8 (+0.50%), and May silver (SIK24) is up +0.128 (+0.46%). Precious metals today are moderately higher. Today’s weaker-than-expected US PPI report is dovish for Fed policy and bullish for precious metals. Another bullish factor for precious metals was today’s post-meeting statement from the ECB that it will soon begin cutting interest rates. In addition, comments today from New York Fed President Williams gave gold a boost when he said he expects the Fed to start cutting rates this year if the economy performs as expected. Finally, precious metals have safe-haven support from Israel-Iran geopolitical risks.

Gains in precious metals are limited after the dollar index today climbed to a 4-3/4 month high. Also, higher global bond yields today are bearish for precious metals.

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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.