Dollar Rises as Iran War Continues

The dollar index (DXY00) rallied to a 10.5-month high on Monday, finishing up by 0.40%.  The dollar gained on safe-haven support on Monday amid concerns of a protracted war in Iran. President Trump told the Financial Times on Sunday that he wants to "take the oil in Iran" and could seize the export hub of Kharg Island, which would involve US ground troops and mark a major escalation of the conflict.  Gains in the dollar were limited, as Monday's sharp decline in T-note yields weakened the dollar's interest-rate differentials. 

The US Mar Dallas Fed manufacturing activity survey fell by -0.4 to -0.2, weaker than expectations of an increase to 2.0.

Fed Chair Powell said inflation expectations are well anchored and that the FOMC will achieve its 2% inflation goal.  He added, "It's too soon to know what the economic effects will be" from the Iran war.

Swaps markets are discounting the odds at 3% 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) fell to a 1-week low on Monday and finished down by -0.45%.  The euro was under pressure on Monday from a stronger dollar.  Also, Monday's economic news that showed the Eurozone Mar economic sentiment index fell more than expected to a 6-month low was bearish for the euro.  In addition, Monday's +3% rally in crude oil prices to a 3-week high is negative for the euro and the Eurozone economy, as Europe imports most of its energy.  Losses in the euro were limited on Monday after German Mar CPI posted its largest year-on-year increase in two years, a hawkish factor for ECB policy. 

The Eurozone Mar economic sentiment index fell -1.6 to a 6-month low of 96.6, weaker than expectations of 96.7.

German Mar CPI (EU harmonized) rose +1.2% m/m and +2.8% y/y, right on expectations, with the +2.8% y/y gain the largest year-on-year increase in two years.

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 Monday fell by -0.40%.  The yen recovered from a 1.75-year low against the dollar on Monday as comments from Japan's top currency official sparked short covering after he said the government may take bold action in foreign exchange markets if the yen continues to weaken.  The yen added to its gains on Monday when BOJ Governor Kazuo Ueda said the BOJ "will be watching currency moves closely," boosting speculation that the BOJ could raise interest rates at next month's meeting to support the yen.  Falling T-note yields on Monday were also supportive of the yen.

BOJ Governor Kazuo Ueda said currency movements are a major factor affecting the economy and prices, and that the BOJ "will be watching currency moves closely." 

Japan's vice minister for international affairs, Atsushi Mimura, the country's top currency official, said, "We're hearing increasing concern that speculative activity is picking up in the foreign exchange market.  If this situation continues, we believe decisive action may soon be necessary."

The markets are discounting a +82% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

April COMEX gold (GCJ26) on Monday closed up +33.50 (+0.75%), and May COMEX silver (SIK26) closed up +0.773 (+1.11%).

Gold and silver prices settled higher on Monday as concerns about a protracted war in Iran boosted safe-haven demand for precious metals.  The war with Iran has entered a fifth week with no end in sight.  Precious metals added to their gains on Monday after President Trump said that he wants to "take the oil in Iran" and could seize the export hub of Kharg Island, which would involve US ground troops and mark a major escalation of the conflict.  In addition, lower global bond yields on Monday were bullish for precious metals.  Precious metals fell back from their best levels on Monday after the dollar index rallied to a 10.5-month high. 

Precious metals have safe-haven support amid concerns about the escalation of the war in the Middle East. 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 ongoing war in Iran.  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 last Friday 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.