Dollar Climbs on Strong US Economic News Ahead of FOMC

The dollar index (DXY00) today is up by +0.24%.  Today's better-than-expected US economic news on Mar housing starts and Mar core capital goods new orders is supporting gains in the dollar.   Also, today's +4% jump in crude oil prices increases inflation expectations, a hawkish factor for Fed policy, and a positive factor for the dollar.  Movement in the dollar is limited ahead of today's FOMC meeting results, where the Fed is expected to keep interest rates unchanged. 

Heightened US-Iran tensions are boosting demand for the dollar as a safe-haven.  The US and Iran are locked in a battle for control of the Strait of Hormuz, with both sides blocking the waterway to gain leverage during an extended ceasefire.  The Wall Street Journal reported that President Trump told his aides to prepare for an extended blockade and that it carries less of a risk for the US than resuming hostilities or walking away from the conflict without securing a deal that curbs Iran's nuclear activities. 

US Mar housing starts unexpectedly rose +10.8% m/m to a 15-month high of 1.502 million, stronger than expectations of a decline to 1.380 million.  Mar building permits, a proxy for future construction, fell -10.8% m/m to a 7-month low of 1.372 million, weaker than expectations of 1.390 million.

US Mar capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, rose +3.3% m/m, stronger than expectations of +0.5% m/m and the largest increase in 5.75 years.

Swaps markets are discounting the odds at 0% for a +25 bp rate hike at the conclusion of today's 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) today is down by -0.19%.  The dollar's strength today is weighing on the euro. Also, the larger-than-expected decline in Eurozone Apr economic confidence to a nearly 5.5-year low is bearish for the euro.  In addition, weaker-than-expected German Apr CPI is dovish for ECB policy and negative for the euro.  Finally, today's +3% surge in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs.

Eurozone Apr economic confidence fell -3.2 to a nearly 5.5-year low of 93.0, weaker than expectations of 95.1.

Eurozone Mar M3 money supply rose +3.2% y/y, stronger than expectations of +3.1% y/y.

German Apr CPI (EU harmonized) rose +0.5% m/m and +2.9% y/y, weaker than expectations of +0.8% m/m and +3.1% y/y.

Swaps are discounting a 12% chance of a +25 bp rate hike by the ECB at Thursday's policy meeting.

USD/JPY (^USDJPY) today is up by +0.31%.  The yen fell to a 4-week low against the dollar today. Higher T-note yields today are undercutting the yen.  Also, today's +4% jump in crude oil prices is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.  Movement in the yen may be limited today, as markets in Japan are closed for the Showa Day holiday. 

The markets are discounting a +66% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is down -68.30 (-1.48%), and May COMEX silver (SIK26) is down -1.489 (-2.03%).

Gold and silver prices extended Tuesday's sharp losses today, with gold posting a 4-week low and silver posting a 3-week low.  Today's stronger dollar and higher global bond yields are weighing on metals prices. Also, today's +4% surge in crude oil prices, driven by the ongoing closure of the Strait of Hormuz, raises inflation expectations and may prompt the world's central banks to pursue tighter monetary policies, a bearish factor for precious metals. 

Heightened Middle East tensions are positive for safe-haven demand of precious metals as both the US and Iran are maintaining blockades of the Strait of Hormuz.  Precious metals also 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 4.5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 8.25-month low last Friday 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.