Dollar Gives up Early Gains as Bond Yields Fall on Lower Treasury Borrowing Estimates

The dollar index (DXY00) on Monday rose by +0.01% and posted a 1-1/2 month high.  The dollar found safe-haven support Monday on increased tensions between the U.S. and Iran after three U.S. servicemen were killed Sunday after a drone attack by Iranian-backed militants on a U.S. base in Jordan.  Also, weakness in EUR/USD was bullish for the dollar after dovish ECB comments Monday knocked the euro down to a 1-1/2 month low against the dollar.  However, the dollar gave up most of its advance Monday when T-note yields tumbled after the Treasury cut its borrowing estimates for Q1. 

Monday’s U.S. economic news was bearish for the dollar after the Jan Dallas Fed manufacturing outlook survey fell -17.0 to an 8-month low of -27.4, weaker than expectations of -11.0.

The U.S. Treasury announced that it would borrow $760 billion this quarter, down from its $816 billion estimate in October.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on Jan 30-31 and a 48% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Monday fell by -0.20% and posted a 1-1/2 month low.  The euro was under pressure Monday after dovish ECB comments bolstered speculation that the ECB will begin to cut interest rates as soon as April.  ECB Vice President Guindos said inflation risks are to the downside, and ECB Governing Council member Centeno said the ECB should lower interest rates sooner rather than later. 

ECB Vice President Guindos said, "There has been good news regarding the evolution of inflation, and that, sooner or later, will end up being reflected in the monetary policy."

ECB Governing Council member Centeno said the ECB should lower interest rates sooner rather than later as he sees "a lot of evidence that inflation is falling in a sustained way."

ECB Governing Council member Kazimir said June is more likely than April for the first ECB interest rate cut as "acting hastily based on short-term surprises without having more clarity about the medium term would be risky."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 28% for its next meeting on March 7 and have fully discounted (+102%) the chances for that same rate cut at the following meeting on April 11.

USD/JPY (^USDJPY) on Monday fell by -0.49%.  The yen on Monday moved higher on weakness in T-note yields. Also, higher Japanese government bond yields on Monday supported the yen on expectations that the BOJ will soon end its negative interest rate policy. 

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 28% for its next meeting on March 19 and at 67% for the following meeting on April 26.

February gold (GCG4) Monday closed +8.10 (+0.40%), and Mar silver (SIH24) closed +0.379 (+1.66%).  Precious metals posted moderate gains on Monday, with silver climbing to a 1-1/2 week high.  Geopolitical risks have boosted safe-haven demand for precious metals on concern about the escalation of conflict in the Middle East after three U.S. servicemen were killed in a drone attack on a base in Jordan near the Syrian border.  Also, a decline in European and U.S. government bond yields on Monday supported precious metals.  In addition, gold prices rose on dovish comments from ECB Vice President Guindos and ECB Governing Council member Centeno, which bolstered speculation the ECB would cut interest rates sooner rather than later.   

On the negative side for precious metals was Monday’s rally in the dollar index to a 1-1/2 month high. Also, gold was under pressure from the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low last Friday. 

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