Dollar Advances with US-Iran Talks in Limbo

The dollar index (DXY00) on Tuesday rose by +0.29% and posted a 1-week high.  The dollar moved higher on Tuesday on the stronger-than-expected US Mar retail sales and Mar pending home sales reports.  The dollar gained further on Tuesday after stock prices slumped when Vice President Vance's trip to Pakistan to meet Iranian negotiators was put on hold after Iran failed to respond to US negotiating positions.

The dollar also has support on signs that Fed Chair nominee Kevin Warsh will support an independent Fed and prioritize low inflation.  Fed Chair nominee Warsh's prepared statement before the Senate Banking Committee said he is committed to ensuring that the conduct of monetary policy remains "strictly independent" and to keeping inflation in check, stating that price stability is a mandate for the Fed "without excuse or equivocation."   

US Mar retail sales rose +1.7% m/m, stronger than expectations of +1.4% m/m and the biggest increase in a year.  Also, Mar retail sales ex-autos rose +1.9% m/m, stronger than expectations of +1.4% m/m and the biggest increase in 3 years.

US Mar pending home sales rose +1.5%, stronger than expectations of +0.5% m/m.

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 Tuesday fell by -0.37% and posted a 1-week low.  Tuesday's German April ZEW survey, which showed German investor optimism fell more than expected to a 3.5-year low, weighed on the euro.  Also, dollar strength on Tuesday was bearish for the euro.  Losses in the euro accelerated on Tuesday after crude oil prices recovered from early losses and rallied more than +2%, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy.

The German Apr ZEW survey expectations of economic growth fell -16.7 to a 3.25-year low of -17.2, weaker than expectations of -5.8.

Swaps are discounting a 13% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Tuesday rose by +0.35%.  The yen dropped to a 1-week low against the dollar on Tuesday after a Nikkei report said the BOJ is likely to keep interest rates unchanged at 0.75% at its policy meeting next week, amid uncertainties stemming from the war in Iran.  Tuesday's higher T-note yields were also bearish for the yen.  Losses in the yen accelerated on Tuesday after crude oil prices recovered from early losses and rallied more than +2%, a bearish factor for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.

The Nikkei reported that the BOJ is likely to keep interest rates unchanged at 0.75% at its policy meeting next week, given uncertainties stemming from the war in Iran, and a decision on whether to raise rates will be delayed until the June meeting.

The markets are discounting a +6% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

June COMEX gold (GCM26) on Tuesday closed down -109.20 (-2.26%), and May COMEX silver (SIK26) closed down -3.550 (-4.44%).

Gold and silver prices sank to 1-week lows on Tuesday and settled sharply lower.  Tuesday's stronger dollar was bearish for metals.  Also, higher global bond yields on Tuesday weighed on precious metals.  Tuesday's stronger-than-expected US Mar retail sales and Mar pending home sales reports are hawkish for Fed policy and undercut precious metals prices.  Losses in precious metals accelerated on Tuesday when crude oil prices recovered from early losses and rallied more than +2%, boosting inflation expectations that could prompt the world's central banks to keep monetary policy tight, a negative factor for precious metals. 

Concerns that the US-Iran war will persist are supporting safe-haven demand for precious metals after Iran on Saturday said the Strait of Hormuz was closed for shipping following a refusal by the US to lift a naval blockade of Iran's vessels.  Also, President Trump said it's "highly unlikely" he will extend the ceasefire with Iran after Wednesday's deadline.  In addition, Tuesday's report from the Nikkei said the BOJ is likely to keep interest rates unchanged at next week's policy meeting, which is supportive for precious metals.

Precious metals remain supported by uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty, which 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 4-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 7-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.