Dollar Tumbles and Gold Soars to a Record High on Dovish Powell Comments

Rich Asplund - Barchart - Wed Apr 3, 2:52PM CDT

The dollar index (DXY00) on Wednesday fell by -0.54%. The dollar retreated Wednesday after the US Mar ISM services index unexpectedly declined and after the Mar ISM services price paid sub-index fell to a 4-year low, dovish factors for Fed policy. The dollar extended its losses on dovish comments from Fed Chair Powell who stated it will be appropriate for the Fed to cut interest rates “at some point this year.”

On the positive side for the dollar was the stronger-than-expected US Mar ADP employment report, a hawkish factor for Fed policy. Also, Atlanta Fed President Bostic said he favored waiting until Q4 for the Fed to begin cutting interest rates.

Fed Chair Powell said, "We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably toward 2%. If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year."

The US Mar ISM services index unexpectedly fell -1.2 to 51.4, weaker than expectations of an increase to 52.8. The Mar ISM services price paid sub-index fell -5.2 to a 4-year low of 53.4, weaker than expectations of 58.4.

The US Mar ADP employment change rose +184,000, stronger than expectations of +150,000. Also, Feb ADP was revised upward to +155,000 from the previously reported +140,000.

Atlanta Fed President Bostic said due to the bumpy nature of inflation progress, "it will likely be appropriate for us to lower interest rates at the end of this year, in the fourth quarter."

The markets are discounting the chances for a -25 bp rate cut at 7% for the next FOMC meeting on April 30-May 1 and 64% for the following meeting on June 11-12.

EUR/USD (^EURUSD) on Wednesday rose by +0.58%. The euro today is moderately higher, garnering support from a weak dollar. Also, today’s report showing the Eurozone Feb unemployment rate unchanged at a record low was bullish for the euro. Gains in the euro accelerated Wednesday after the dollar sank on dovish comments from Fed Chair Powell.

On the bearish side for EUR/USD was an easing of price pressures after Eurozone Mar CPI rose less than expected, a dovish factor for ECB policy.

The Eurozone Feb unemployment rate was unchanged at a record low of 6.5%, higher than expectations of a decline to 6.4%.

Eurozone Mar CPI eased to 2.4% y/y from 2.6% y/y in Feb, better than expectations of 2.5% y/y. Mar core CPI eased to 2.9% y/y from 3.1% y/y in Feb, better than expectations of 3.0% y/y and the smallest increase in 2 years.

ECB Governing Council member Holzmann said, "An ECB rate cut in April is not on my radar. In June, if the data allows it, a decision will be made."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 9% for its next meeting on April 11 and 96% for the following meeting on June 6.

USD/JPY (^USDJPY) Wednesday rose by +0.07%. The yen Wednesday fell to a 1-week low against the dollar, pressured by rising T-note yields. Also, a downward revision today to the Japan Mar Jibun Bank services PMI was negative for the yen. Losses in the yen were contained by speculation that Japanese authorities may be close to intervening in currency markets to support the yen as several government members over the past week reiterated that the Japanese government would take appropriate measures against any excessive currency moves.

The Japan Mar Jibun Bank services PMI was revised downward by -0.8 to 54.1 from the previously reported 54.9.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 8% for the following meeting on June 14.

June gold (GCM4) on Wednesday closed up +33.2 (+1.45%), and May silver (SIK24) closed up +1.137 (+4.39%). Precious metals Wednesday rallied sharply, with June gold posting a contract high and nearest-futures April gold climbing to an all-time high. Also, May silver rose to a contract high, and nearest-future April silver climbed to a 2-year high.

A weaker dollar Wednesday was bullish for metals. Also, geopolitical risks are boosting safe-haven demand for precious metals after Iran threatened retaliation against Israel for launching airstrikes on Iranian military officials in Syria last Friday. Precious metals Wednesday extended their gains on dovish comments from Fed Chair Powell, who reiterated that it will be appropriate for the Fed to cut interest rates “at some point this year.”

On the negative side, higher T-note yields Wednesday were bearish for precious metals. Also, Wednesday’s stronger-than-expected US Mar ADP employment report is hawkish for Fed policy. In addition, a recovery in stocks on Wednesday from early losses to higher on the day reduced some safe-haven demand 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.