Dollar Advances as Iran War Rages

The dollar index (DXY00) rose to a 1-week high on Friday and finished up by +0.27%.  The dollar moved higher on Friday as the risk of a protracted Iran war boosts safe-haven demand for the dollar.  Also, Friday's +5% rally in crude oil prices is pushing inflation expectations higher, potentially forcing the Fed to keep monetary policy restrictive, a bullish factor for the dollar.  Friday's stock slump also boosted liquidity demand for the dollar. 

The dollar found support on Friday as Iran and Israel exchanged missile fire, and Iran targeted several Gulf states as the war entered its 27th day.  Saudi Arabia said it intercepted two ballistic missiles headed for Riyadh, and Kuwait said drones damaged the port of Shuwaikh, while another port called Mubarek Al Kabeer was also targeted.  Meanwhile, the Wall Street Journal reported the Pentagon is considering sending as many as 10,000 additional troops to the Middle East, on top of 5,000 already sent.

The University of Michigan US Mar consumer sentiment index was revised lower to 53.3 from the previously reported 55.5, weaker than expectations of 54.0.

The University of Michigan US Mar 1-year inflation expectations were revised upward to 3.8% from 3.4%, stronger than expectations of 3.6%.  The Mar 5-10 year inflation expectations were unrevised at 3.2%, lower than expectations of an increase to 3.5%.

Swaps markets are discounting the odds at 4% for a +25 bp rate hike at the April 28-29 FOMC meeting.

The dollar continues to be undercut by a poor outlook for interest rate differentials, with the FOMC expected to cut interest rates by at least -25 bp in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bp in 2026. 

EUR/USD (^EURUSD) on Friday fell by -0.12%.  The euro fell on Friday due to strength in the dollar. Also, ECB Feb inflation expectations unexpectedly eased, a dovish factor for ECB policy that is negative for the euro. In addition, Friday's +5% rally in crude oil prices is negative for the euro and the Eurozone economy, as Europe imports most of its energy.  Finally, the odds of an ECB rate hike next month slipped, weighing on the euro, after ECB Executive Board member Isabel Schnabel said the ECB shouldn't rush its response to the Iran war.

Losses in the euro were limited on Friday due to hawkish comments from ECB Governing Council member Pierre Wunsch, who said he can't rule out an ECB rate increase in April.

ECB Feb 1-year CPI expectations unexpectedly eased to a 16-month low of 2.5% from 2.6% in Jan, weaker than expectations of an increase to 2.8%.  ECB Feb 3-year CPI expectations unexpectedly eased to 2.5% from 2.6% in Jan, weaker than expectations of an increase to 2.7%.

ECB Governing Council member Pierre Wunsch said, "an ECB rate hike in April is not out of the question" if there is solid evidence that the Iran war will be lasting and lead to higher inflation.

ECB Executive Board member Isabel Schnabel said the ECB shouldn't rush its response to the Iran war and must be careful not to "overreact."

Swaps are discounting a 52% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Friday rose by +0.29%.  The yen was under pressure on Friday, falling to a 20-month low against the dollar.  Friday's +5% surge in crude oil prices is negative for Japan's economy and the yen, as Japan imports most of its energy needs.  Also, higher T-note yields on Friday were bearish for the yen.

Losses in the yen are limited today after the 10-year Japan JGB bond yield jumped to a 27-year high of 2.388%, which strengthens the yen's interest rate differentials.  Also, the yen has fallen past 160 yen per dollar, a level at which the BOJ has intervened in the forex market several times to support the yen.

The markets are discounting a +70% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

April COMEX gold (GCJ26) on Friday closed up +116.20 (+2.66%), and May COMEX silver (SIK26) closed up +1.862 (+2.74%).

Gold and silver prices settled sharply higher on Friday as concerns about a protracted Iran war are boosting safe-haven demand for precious metals.  Also, Friday's stock plunge boosted safe-haven demand for precious metals.  In addition, ramped-up trade tensions between the US and China are supporting safe-haven demand for precious metals after China started a pair of investigations into US trade practices, retaliating against similar probes by the Trump administration earlier this month.

On the negative side for precious metals was Friday's rally in the dollar index to a 1-week high, and soaring global bond yields.  Also, Friday's +5% surge in crude oil prices raises inflation expectations that may keep the world's central banks pursuing restrictive policies, a bearish factor for precious metals.  In addition, hawkish comments on Friday from ECB Governing Council member Pierre Wunsch weighed on precious metals when he said, "an ECB rate hike in April is not out of the question."

Precious metals have safe-haven support amid concerns about the escalation of the war in the Middle East. The Wall Street Journal reported that the Pentagon is considering sending as many as 10,000 additional troops to the Middle East, adding to the 5,000 troops of two Marine Expeditionary Units already sent. Also, Saudi Arabia agreed to give the US military access to King Fahd Air Base, and the UAE closed an Iranian-owned hospital and club.  Iran's Middle Eastern neighbors are growing frustrated with Iran, which has responded to US and Israeli attacks by hitting targets in several nearby nations. 

Precious metals continue to see strong safe-haven demand amid the war in Iran, which has entered its 27th day.  Also, uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty are boosting demand for precious metals as a store of value.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 3.5-month low on Thursday after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 6.25-month low last Friday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following the recent news that bullion held in China's PBOC reserves rose by +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves.