Dollar Falls and Gold Rallies on US-Iran Ceasefire

The dollar index (DXY00) on Wednesday fell by -0.71% and posted a 4-week low.  The dollar plummeted on Wednesday after the US and Iran agreed to a ceasefire, curbing safe-haven demand for the dollar.  Also, Wednesday's surge in equity markets reduced liquidity demand for the dollar.  In addition, sharply lower T-note yields on Wednesday have weakened the dollar's interest rate differentials. 

The minutes of the March 17-18 FOMC meeting were neutral for the dollar.  The minutes stated that "The vast majority of participants judged that upside risks to inflation and downside risks to employment were elevated, and the majority of participants noted that these risks had increased with developments in the Middle East."

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 +0.47% and posted a 5-week high.  Wednesday's plunge in the dollar boosted the euro.  Also, Wednesday's -15% plunge in crude oil prices was positive for the euro and the Eurozone economy, as Europe imports most of its energy needs.  Wednesday's weaker-than-expected economic news on Eurozone retail sales, producer prices, and German factory orders limited gains in the euro.

Eurozone Feb retail sales fell -0.2% m/m, right on expectations and the biggest decline in 9 months.

Eurozone Feb PPI fell -3.0% y/y, right on expectations and the biggest decline in 16 months.

German Feb factory orders rose +0.9% m/m, weaker than expectations of +3.0% m/m.

Swaps are discounting a 32% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Wednesday fell by -0.57%.  The yen on Wednesday rallied to a 2.5-week high against the dollar.  Wednesday's slump in the dollar was supportive of the yen, along with lower T-note yields. Also, Wednesday's economic news showing strength in Japanese earnings is hawkish for BOJ policy and bullish for the yen.

On the negative side for the yen was the larger-than-expected decline in the Japan Mar Eco Watchers Outlook Survey to a 5.25-year low.  Also, Wednesday's +5% surge in the Nikkei Stock Index to a 1-month high reduced safe-haven demand for the yen.    

The Japan Mar eco watchers outlook survey fell -11.3 to a 5.25-year low of 38.7, weaker than expectations of 48.0.

Japan's Feb real cash earnings rose 1.9% y/y, stronger than expectations of 1.3% y/y and the largest increase in 4.75 years.  Also, Feb cash earnings rose 3.3% y/y, stronger than expectations of 2.7% y/y and the biggest increase in 7 months.

The markets are discounting a +55% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

June COMEX gold (GCM26) on Wednesday closed up +92.50 (+1.97%), and May COMEX silver (SIK26) closed up +3.398 (+4.72%).

Gold and silver prices rallied sharply on Wednesday, with gold climbing to a 2.5-week high and silver rallying to a 3-week high.  Wednesday's sharp decline in the dollar index to a 4-week low is bullish for metals prices. Also, sharply lower global bond yields on Wednesday were supportive of precious metals.  In addition, the US-Iran ceasefire sent crude oil prices plunging by more than -15% on Wednesday, easing inflation expectations that could prompt the world's central banks to ease monetary policy, a bullish factor for precious metals. 

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 3.75-month low last Tuesday after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 6.5-month low on March 27 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 +160,000 ounces to 74.38 million troy ounces in March, the seventeenth consecutive month the PBOC has boosted its gold reserves.