Dollar Rallies as U.S. Economic Strength Keeps Fed Hawkish

The dollar index (DXY00) on Friday rose by +0.55% and posted a 1-1/2 month high.  Higher T-note yields boosted the dollar along with the prospects for a hawkish Fed after Friday’s stronger-than-expected U.S. economic reports.  The dollar Friday also found support on hawkish comments from Cleveland Fed President Mester, Boston Fed President Collins, and Fed Governor Jefferson.

Friday’s U.S. economic news was stronger-than-expected and bullish for the dollar.  Jan personal spending rose +1.8% m/m, stronger than expectations of +1.4% m/m and the biggest increase in 1-3/4 years.  The Jan core PCE deflator rose +0.6% m/m and +4.7% y/y, stronger than expectations of +0.4% m/m and +4.3% y/y.  Jan new home sales rose +7.2% m/m to a 10-month high of 670,000, stronger than expectations of 620,000.  The University of Michigan U.S. Feb consumer sentiment index was revised upward by +0.6 points to a 13-month high of 67.0.

Hawkish Fed comments Friday were supportive of the dollar.  Fed Governor Jefferson said, "the ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly." Also, Boston Fed President Collins said the Fed has to keep raising interest rates "to reach a sufficiently restrictive level, and then holding there for an extended time" to get inflation down to the Fed's 2% target.  In addition, Cleveland Fed President Mester said the Fed is "going to have to do a little more to get back to price stability of 2%," and she still sees raising the fed funds rate "somewhat" above 5% and staying there for a time.

EUR/USD (^EURUSD) on Friday fell by -0.40% and dropped to a new 1-1/2 month low.  A stronger dollar Friday undercut the euro.  The euro was also undercut after Germany’s Q4 GDP was revised lower.  On the other hand, the euro had support from an increase in German Mar GfK consumer confidence to an 8-month high and hawkish comments from ECB Governing Council member Nagel.

ECB Governing Council member and Bundesbank President Nagel said with core inflation, in particular, still much too high, monetary policy, therefore, has to tighten the reins," and he "does not exclude further significant interest rate hikes beyond March."

German Q4 GDP was revised downward to -0.4% q/q and +0.3% y/y from the previously reported -0.2% q/q and +0.5% y/y.

German Mar GfK consumer confidence rose +3.3 to an 8-month high of -30.5, right on expectations.

USD/JPY (^USDJPY) on Friday rose by +1.25%.  The yen Friday sold off sharply to a 2-month low against the dollar.  Higher T-notes yields Friday weighed on the yen.  The yen was also under pressure on comments from BOJ Governor nominee Ueda who said the BOJ's current easing is "appropriate" and a sudden tightening now would impact businesses negatively.

Japan Jan national CPI ex-fresh food and energy rose +3.2% y/y, the most in 32 years.

BOJ Governor nominee Ueda said the BOJ's current monetary policy is "appropriate" and a sudden tightening now would impact businesses negatively.  He also said the BOJ would mull yield-curve-control normalization if the price outlook improves, and that the BOJ will stop its massive bond-buying if its 2% inflation target is met.

April gold (GCJ3) on Friday closed down -9.70 (-0.53%), and March silver (SIH23) closed down -0.496 (-2.33%).  Precious metals Friday posted moderate losses, with gold falling to a 2-month low and silver tumbling to a 3-month low.  A rally in the dollar index to a 1-1/2 month high Friday undercut metals prices. Also, higher global bond yields Friday were bearish for precious metals.  In addition, hawkish comments Friday from Cleveland Fed President Mester, Fed Governor Jefferson, and Boston Fed President Collins weighed on metals. Another bearish factor for gold prices is the continued liquidation of gold holdings in ETFs after holdings of gold in ETFs fell to a new 2-3/4 year low Thursday.

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