Dollar Ticks Lower on Strength in the British Pound and Euro

The dollar index (DXY00) on Tuesday fell by -0.06%.  The dollar Tuesday fell to a 1-week low and posted modest losses as strong UK labor market news pushed GPD/USD up to a 1-week high, and hawkish ECB comments pushed EUR/USD up to a 1-week high.  The dollar recovered most of its losses as T-note yields climbed on hawkish Fed comments and after Tuesday’s U.S. Jan CPI report came in higher than expected.

Tuesday’s U.S. CPI report was stronger than expected, which was hawkish for Fed policy and supportive for the dollar.  Jan CPI eased to 6.4% y/y from 6.5% y/y in Dec, stronger than expectations of 6.2% y/y. The Jan core CPI fell to 5.6% y/y from 5.7% y/y in Dec, stronger than expectations of 5.5% y/y.

Fed comments Tuesday were generally hawkish and supportive of the dollar.  Dallas Fed President Logan said, "we must remain prepared to continue rate increases for a longer period than previously anticipated if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions."  Also, Richmond Fed President Barkin said "inflation is normalizing, but it's coming down slowly," and if it persists at levels well above our target, we'll have to raise interest rates to a higher level than previously anticipated.

On the dovish side, Philadelphia Fed President Harker said U.S. CPI data shows inflation is coming down slowly, and the Fed needs to maintain its 25 bp rate hike path.  He also said the funds rate would peak above 5% but by how much is unclear, and that the Fed has to be cautious about raising rates while running off the balance sheet.

EUR/USD (^EURUSD) on Tuesday rose by +0.12% and posted a 1-week high.  The euro moved higher Tuesday after European government bond yields jumped on hawkish comments from ECB Governing Council member Maklhouf who said he's "open to acting forcefully to get inflation down to our target."

Tuesday’s Eurozone economic news was mixed for EUR/USD.  On the positive side, Eurozone Q4 GDP rose +0.1% q/q and +1.9% y/y, right on expectations.  Conversely, the German Jan wholesale price index eased to +10.6% y/y from +12.8% y/y in Dec, the slowest pace of increase in 20 months.

USD/JPY (^USDJPY) on Tuesday rose by +0.49% and dropped to a 5-week low against the dollar.  The yen is under pressure on speculation that the appointment of former BOJ member Ueda to be BOJ Governor will not affect BOJ policy when Ueda said, “the BOJ’s current policy is appropriate and monetary easing needs to be continued at this point.”  The yen extended its losses after Tuesday’s economic news showed Japan's Q4 GDP expanded less than expected.

Tuesday’s economic news was mixed for the yen.  On the negative side, Japan's Q4 GDP rose +0.6% (q/q annualized), weaker than expectations of +2.0%.  Conversely, Japan Dec industrial production was revised upward to +0.3% m/m from the initially reported -0.1% m/m.

April gold (GCJ3) on Tuesday closed up +1.90 (+0.10%), and March silver (SIH23) closed up +0.021 (+0.10%).  Precious metals Tuesday recovered from early losses and settled slightly higher.  Tuesday's decline in the dollar index to a 1-week low was bullish for precious metals.  A stronger-than-expected U.S. Jan CPI report Tuesday also boosted demand for gold as a hedge against inflation.  Metals on Tuesday initially moved lower, with gold falling to a 5-week low and silver dropping to a 2-1/2 month low after global bond yields moved higher on hawkish central bank comments.  Gold prices also remain under pressure due to the continued liquidation of gold holdings in ETFs after holdings of gold in ETFs fell to a 2-3/4 year low Monday.

• Stocks Retreat as Elevated U.S. CPI Keeps Hawkish Fed in Play
• Dollar Fades on Lower T-note Yields and Stronger Stocks
• Stocks Push Higher on U.S Inflation Optimism
• Dollar Climbs With T-Note Yields