Dollar Tanks on Weak U.S. Economic Reports and Dovish Powell

The dollar index (DXY00) on Wednesday fell by -0.89%.  The dollar Wednesday tumbled to a 9-1/4 month low on dovish comments from Fed Chair Powell that sent bond yields tumbling and fueled a rally in stocks, which reduced liquidity demand for the dollar. 

Wednesday’s U.S. economic news was mostly weaker than expected and weighed on the dollar.  The Jan ADP employment change rose +106,000, weaker than expectations of +180,000 and the smallest increase in 2 years.  Also, the Jan ISM manufacturing index fell -1.0 to 47.4, weaker than expectations of 48.0 and the steepest pace of contraction in more than 2-1/2 years.  In addition, Dec construction spending unexpectedly fell -0.4% m/m weaker than expectations of no change and the biggest decline in 4 months.  On the positive side for the dollar, Dec JOLTS job openings unexpectedly rose +572,000 to a 5-month high of 11.012 million, showing a stronger labor market than expectations of a decline to 10.3 million.

The FOMC, as expected, raised the fed funds target range by 25 bp to 4.50%-4.75% and said inflation has eased somewhat but remains elevated, and "ongoing" rate increases will be appropriate.

Fed Chair Powell said inflation "remains well above our longer-run goal" and monetary policy will need to stay restrictive "for some time," as officials need "substantially more evidence" to be confident that inflation was on track to decline to the Fed's 2% target. 

The dollar retreated after Fed Chair Powell said that the "disinflation process has started," suggesting the Fed's aggressive rate hike pace has begun reducing the pace of price growth.  The dollar also fell back after Fed Chair Powell did not push back against the loosening of financial conditions in recent months when he said the Fed's focus is "not on short-term moves but on sustained changes."

EUR/USD (^EURUSD) on Wednesday rallied sharply by +1.22%.   The euro Wednesday soared to a 9-3/4 month high after the dollar plunged on dovish comments from Fed Chair Powell.  The euro also garnered support Wednesday after the Eurozone Jan CPI report showed core prices remained stubbornly high, which is hawkish for ECB policy. Short-covering Wednesday also boosted EUR/USD on expectations for the ECB to raise interest rates by 50 bp on Thursday.

Eurozone Jan CPI eased to 8.5% y/y from 9.2% y/y in Dec, weaker than expectations of 8.9% y/y and the slowest pace of increase in 8 months.  However, Jan core CPI remained unchanged at 5.2% y/y, stronger than expectations of 5.1% y/y.

The Eurozone Dec unemployment rate was unchanged at 6.6% y/y, showing a weaker labor market than expectations of a decline to 6.5% y/y.

USD/JPY (^USDJPY) on Tuesday fell by -1.01%.  The yen Wednesday rallied to a 1-1/2 week high against the dollar.  A slump in T-note yields Wednesday was supportive for the yen.  Also, weaker-than-expected U.S. economic reports Wednesday weighed on the dollar and sparked short-covering in the yen. 

April gold (GCJ3) on Wednesday closed down -2.50 (-0.13%), and March silver (SIH23) closed down -0.227 (-0.95%).  Precious metals Wednesday fell moderately.  Wednesday’s economic news that showed higher than expected Eurozone Jan core CPI signal stubborn core price pressures that are hawkish of ECB policy and undercut gold prices. Silver prices also retreated Wednesday after India, the world’s largest silver consumer, said it plans to raise import taxes on silver ore, which may reduce its demand for the metal.  Gold prices rallied above Wednesday afternoon’s closing level after dovish comments from Fed Chair Powell sent the dollar tumbling to a 9-month low.   

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