Dollar Falls in Hopes of De-escalation of Middle East Hostilities

The dollar index (DXY00) fell by -0.36% on Thursday and held just above Wednesday's 4-week low.  Weaker-than-expected US economic news on Thursday weighed on the dollar.  Q4 GDP was unexpectedly revised lower, Feb personal income and spending rose less than expected, and weekly jobless claims rose more than expected to an 8-week high.  The dollar fell to its low on Thursday in hopes of de-escalation of hostilities in the Middle East when Axios reported that direct negotiations between Israel and Lebanon will begin next week in Washington.

Losses in the dollar were limited as doubts about the sustainability of the US-Iran ceasefire boosted some safe-haven demand for the dollar.  Also, Thursday's +3% jump in WTI crude oil prices raises inflation expectations, hawkish for Fed policy, and supportive of the dollar.

US weekly initial unemployment claims rose by +16,000 to an 8-week high of 219,000, showing a weaker labor market than expectations of 210,000.

US Feb personal spending rose +0.5% m/m, weaker than expectations of +0.6% m/m.  Feb personal income unexpectedly fell -0.1% m/m, weaker than expectations of +0.3% m/m and the first decline in nine months.

The US Feb core PCE price index rose +0.4% m/m and +3.0% y/y, right on expectations.

US Q4 GDP was revised downward to +0.5% (q/q annualized), weaker than expectations of no change at +0.7%, as Q4 personal consumption was revised lower to 1.9% from the previously reported 2.0%.

Swaps markets are discounting the odds at 2% 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) rose by +0.32% on Thursday and posted a fresh 5-week high.  Thursday's weaker dollar was supportive of the euro.  Also, Thursday's better-than-expected German trade news for February is bullish for the euro.  In addition, hawkish comments from ECB Governing Council member Olaf Sleijpen boosted the euro when he said the ECB will act if needed to keep inflation at target.

Gains in the euro were limited on Thursday after German Feb industrial production unexpectedly declined. Also, today's +6% jump in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs. 

German Feb industrial production unexpectedly fell -0.3% m/m, weaker than expectations of a +0.7% m/m increase.

German trade news was better than expected after German Feb exports rose +3.6% m/m, stronger than expectations of +1.3% m/m and the biggest increase in 3.75 years.  Feb imports rose +4.7% m/m, stronger than expectations of +3.5% m/m and the biggest increase in 2.75 years.

ECB Governing Council member Olaf Sleijpen said, "Persistently high oil prices will ultimately feed through to the prices of other products, and thus also to wage formation, which could amplify inflationary effects.  In that case, the ECB will naturally intervene to keep inflation around 2% in the medium term."

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

USD/JPY (^USDJPY) on Thursday rose by +0.30%.  The yen came under pressure Thursday after the Japan Mar consumer confidence index fell more than expected to a 10-month low.  Also, Thursday's +3% jump in crude oil prices is negative for the Japanese economy and the yen, as Japan imports 90% of its energy needs. Limiting losses in the yen was Thursday's report on Mar machine tool orders that posted their largest increase in 4 years. 

The Japan Mar consumer confidence index fell -6.4 to a 10-month low of 33.3, weaker than expectations of 38.3.

Japan Mar machine tool orders rose +28.1% y/y, the largest increase in four years.

The markets are discounting a +59% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

June COMEX gold (GCM26) on Thursday closed up +40.80 (+0.85%), and May COMEX silver (SIK26) closed up +1.053 (+1.40%).

Gold and silver prices settled higher on Thursday.  Dollar weakness on Thursday pushed metals prices higher.  Also, doubts about the sustainability of the US-Iran ceasefire boosted some safe-haven demand for precious metals. 

Gains in precious metals were limited on Thursday from a +3% jump in crude oil prices, which raises inflation expectations that could prompt the world's central banks to tighten monetary policy, a bearish factor for precious metals.  Concerns about global demand for industrial metals also weighed on silver prices on Thursday, after the US Q4 GDP was revised lower and German Feb industrial production unexpectedly declined. 

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.