Dollar Declines Amid War-End Optimism

The dollar index (DXY00) on Wednesday added to Tuesday's losses and fell by -0.34%.  The dollar is under pressure due to optimism that the war in Iran will end soon.  Wednesday's stock rally also reduced liquidity demand for the dollar.  The dollar recovered from its worst level after better-than-expected US economic news on Wednesday: Mar ADP employment, Feb retail sales, and the Mar ISM manufacturing index.

President Trump on Wednesday said he foresaw the US ending the war with Iran within two to three weeks.  Mr. Trump said Iran has asked for a ceasefire, which he will consider when the Strait of Hormuz is "open, free and clear." Meanwhile, the US and Israeli forces kept up their bombardment of Iran, and Israel, Bahrain, Kuwait, and the UAE all reported attacks by Iran, with Qatar saying a fuel oil tanker was struck in Qatari waters. 

President Trump will give a televised address to the country at 9 pm Eastern time on Wednesday night to provide an "important update" on Iran.  He said Iran could still reach a deal with the US; however, an agreement with Iran isn't a prerequisite for ending the war. 

US MBA mortgage applications fell -10.4% in the week ended March 27, with the purchase mortgage sub-index down -2.6% and the refinancing sub-index down -17.3%.  The average 30-year fixed rate mortgage rose +14 bp to a 7-month high of 6.57% from 6.43% in the prior week.

The US Mar ADP employment change rose by +62,000, stronger than expectations of +40,000.

US Feb retail sales rose +0.6% m/m, stronger than expectations of +0.5% m/m, and Feb retail sales ex-autos rose +0.5% m/m, stronger than expectations of +0.3% m/m.

The US Mar ISM manufacturing index unexpectedly rose +0.3 to 52.7, stronger than expectations of a decline to 52.3 and the strongest pace of expansion in 3.5 years.  The Mar ISM prices paid sub-index rose +7.8 to a 3.75-year high of 78.3, stronger than expectations of 74.0.

Hawkish comments on Wednesday from St. Louis Fed President Alberto Musalem supported the dollar as he stated that risks are rising to both inflation and employment and said, "I expect the current setting of the policy rate will remain appropriate for some time." 

Swaps markets are discounting the odds at 1% 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 Wednesday rose by +0.25%.  The euro moved higher on Wednesday amid a weaker dollar. Also, Wednesday's upward revision to the Eurozone Mar S&P manufacturing PMI was supportive of the euro. In addition, the -1% fall in crude oil prices on Wednesday is bullish for the Eurozone economy that imports most of its energy needs.  On the negative side of the euro was Wednesday's report that showed an unexpected increase in the Eurozone unemployment rate.

The Eurozone Mar S&P manufacturing PMI was revised upward by +0.2 to 51.6 from the previously reported 51.4, the strongest pace of expansion in 3.75 years.

The Eurozone Feb unemployment rate unexpectedly rose +0.1 to 6.2%, showing a weaker labor market than expectations of no change at 6.1%.

Swaps are discounting a 48% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Wednesday rose by +0.12%.  The yen fell from a 1-week high against the dollar on Wednesday and turned lower after a +5% surge in the Nikkei Stock Index curbed yen safe-haven demand.  Also, a rebound in T-note yields on Wednesday from early losses was bearish for the yen.

The yen on Wednesday initially climbed to a 1-week high against the dollar amid dollar weakness and better-than-expected Japanese economic news.  The Q1 Tankan large manufacturing business conditions survey rose to a 4-year high, and the Mar S&P manufacturing PMI was revised upward. Also, the -1% fall in crude oil prices on Wednesday was supportive for the Japanese economy and the yen. 

The Japan Q1 Tankan large manufacturing business conditions survey rose +1 to a 4-year high of 17, stronger than expectations of 16.

The Japan Mar S&P manufacturing PMI was revised upward by +0.2 to 51.6 from the previously reported 51.4.

The markets are discounting a +73% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

June COMEX gold (GCM26) on Wednesday closed up +134.50 (+2.87%), and May COMEX silver (SIK26) closed up +1.159 (+1.55%).

Gold and silver prices rallied sharply on Wednesday to 1.5-week highs.  Precious metals found support on Wednesday from a weaker dollar. Gold prices also gained in hopes that the war in the Middle East may be nearing a resolution, which could put pressure on energy prices and ease inflation, allowing the Fed to cut interest rates, a bullish factor for precious metals.  Wednesday's stock rally has curbed some safe-haven demand for precious metals. 

Wednesday's economic reports showing strength in global manufacturing activity are supportive of industrial metals demand and silver prices.  The US Mar ISM manufacturing index expanded at its strongest pace in 3.5 years, and the Eurozone Mar S&P manufacturing PMI was revised upward to its strongest pace in 3.75 years.  In addition, Japan's Mar S&P manufacturing PMI was revised upward.

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 said Iranian nationals aren't allowed to enter or transit the country.  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 on Tuesday 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 +30,000 ounces to 74.22 million troy ounces in February, the sixteenth consecutive month the PBOC has boosted its gold reserves.