Dollar Slips on U.S. Economic Concerns

The dollar index (DXY00) on Thursday fell by -0.30% but remained above Wednesday’s 7-1/2 month low.  Recession fears continued to weigh on the dollar after Wednesday’s weaker-than-expected U.S. economic news on Dec retail sales and Dec manufacturing production. Also, hawkish ECB comments Thursday strengthened EUR/USD and weighed on the dollar.  The dollar recovered from its worst levels Thursday after better-than-expected U.S. economic news boosted bond yields.

Thursday’s U.S. economic news was mixed for the dollar.  On the negative side, Dec housing permits, a proxy for future construction, fell -1.6% m/m to a 2-1/2 year low of 1.330 million, weaker than expectations of 1.365 million.  Conversely, Dec housing starts fell -1.4% m/m to a 5-month low of 1.382 million, a smaller decline than expectations of 1.358 million.  Also, weekly initial unemployment claims unexpectedly fell -15,000 to an 8-1/2 month low of 190,000, showing a stronger labor market than expectations of an increase to 214,000.  In addition, the Jan Philadelphia Fed business outlook survey rose +4.8 to -8.9, stronger than expectations of -11.0.

Fed comments Thursday were mixed for Fed policy and the dollar.  On the dovish/bearish side, Boston Fed President Collins said, "now that interest rates are in restrictive territory, I believe it is appropriate to have shifted from the initial expeditious pace of tightening to a slower pace."  On the hawkish/bullish side, Fed Vice Chair Brainard said, "even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis."

EUR/USD (^EURUSD) on Thursday rose by +0.40% and is moderately below Wednesday’s 8-3/4 month high.  Hawkish comments Thursday from ECB President Lagarde and ECB Governing Council member Knot gave the euro a boost when they said inflation is still too high and interest rates will still have to rise.  Also, a hawkish account of the Dec ECB meeting was supportive of EUR/USD as “a large number" of officials preferred a 75 bp rate hike rather than a 50 bp rate hike.

ECB President Lagarde said, "inflation by all accounts, whichever way you look at it, is way too high. We shall stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner."

ECB Governing Council member Knot said there'll be more than one half-point increase in interest rates, with the inflation situation still "not satisfactory."

The account of the Dec ECB meeting was hawkish, with "a large number" of officials preferring a +75 bp rate hike rather than a +50 bp rate hike, as "the latest data suggested that inflation was becoming much more broad-based and persistent." 

USD/JPY (^USDJPY) on Thursday fell by -0.41%.   The yen Thursday strengthened on speculation the BOJ will make a shift in its monetary policy after BOJ Governor Kuroda said he “cannot rule out” a future change in the BOJ’s yield-curve-control.  Higher T-note yields Thursday limited the upside in the yen. 

Thursday’s Japanese trade news was mixed for the yen.   Japan Dec exports rose +11.5% y/y, stronger than expectations of +10.6% y/y.  However, Dec imports rose +20.6% y/y, weaker than expectations of +22.6% y/y.

February gold (GCG3) on Thursday closed up +16.90 (+0.89%), and March silver (SIH23) closed up +0.223 (+0.94%).  Precious metals Thursday settled moderately higher, with gold posting an 8-1/2 month high.  A weaker dollar Thursday was supportive of metals prices.  Also, a slump in stocks Thursday boosted the safe-haven demand for precious metals. Gains in metals were limited due to higher global bond yields. 

• Economic Concerns and Debt Ceiling Risk Weigh on Stocks
• Dollar Recovers on Weak Stocks and Hawkish Fed Comments
• Stocks Give Up Early Gains as Economic Growth Slows
• Dollar Moves Higher with T-Note Yields