Dollar Rallies on Fed Divergence and Heightened Geopolitical Risks

Rich Asplund - Barchart - Fri Apr 12, 2:33PM CDT

The dollar index (DXY00) on Friday rose by +0.72% and posted 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 Fed comments Friday from Boston Fed President Collins, Kansas City Fed President Schmid, and Atlanta Fed President Bostic supported the dollar when they said they were in no hurry to cut interest rates. In addition, war jitters in the Middle East hammered stocks Friday 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.

Atlanta Fed President Bostic said he is "not in a hurry" to cut interest rates, and his 2024 outlook is for one rate cut toward the end of the year.

Kansas City Fed President Schmid said he prefers a "patient" approach to rate cuts and policymakers should wait for "clear and convincing" evidence that inflation is headed back toward 2% before cutting interest rates rather than adjusting policy preemptively.

The markets are discounting the chances for a -25 bp rate cut at 5% for the next FOMC meeting on April 30-May 1 and 29% for the following meeting on June 11-12.

EUR/USD (^EURUSD) Friday fell by -0.81% and posted a 5-1/4 month low. Strength in the dollar Friday undercut the euro on divergence between the Fed and ECB, as the Fed is expected to delay rate cuts, and the ECB is expected to start cutting rates in June. Also, dovish comments were made on Friday by ECB Governing Council members Kazaks, Stournaras, and Muller, who weighed on the euro when they said they expected 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 95% for its next meeting on June 6 and fully priced in (+148%) that rate cut for the following meeting on July 18.

USD/JPY (^USDJPY) on Friday fell by -0.05%. The yen today rebounded from a 33-year low against the dollar and posted modest gains. Friday’s decline in T-note yields 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 31% for the following meeting on June 14.

June gold (GCM4) on Friday closed up +1.4 (+0.06%), and May silver (SIK24) closed up +0.080 (+0.28%). Precious metals finished slightly higher on Friday, with Jun gold posting a contract high and nearest-futures April gold at an all-time high. Silver prices also posted a 3-year high.

Escalating Middle East tensions and stock market weakness fueled safe-haven demand for precious metals Friday. 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 Friday were supportive of precious metals. Silver prices also have carryover support from Friday’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.

However, long liquidation pressures emerged Friday, and precious metals gave up nearly all of their advance after the dollar index jumped to a 5-1/4 month high. Also, hawkish Fed comments Friday weighed on precious metals after Boston Fed President Collins, Kansas City Fed President Schmid, and Atlanta Fed President Bostic said they were in no hurry to cut interest rates.

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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.