Dollar Soars as T-Notes Yields Jump on Inflation Fears

The dollar index (DXY00) rose by +0.97% on Monday and posted a 5-week high.  The dollar rallied on Monday after oil prices surged to an 8.25-month high, boosting inflation expectations and reducing the chance of additional Fed rate cuts, a supportive factor for the dollar.  Also, Monday's better-than-expected Fed ISM manufacturing report was supportive of the dollar.  In addition, sharply higher T-note yields on Monday strengthened the dollar's interest rate differentials. 

The US Feb ISM manufacturing index fell -0.2 to 52.4, stronger than expectations of 51.5.  The Feb ISM prices paid sub-index rose +11.5 to a 3.5-year high of 70.5, stronger than expectations of 60.0.

Swaps markets are discounting the odds at 2% for a -25 bp rate cut at the next policy meeting on March 17-18.

The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026. 

EUR/USD (^EURUSD) fell by -1.08% on Monday and posted a 5-week low.  The dollar's strength on Monday weighed on the euro.  Also, Monday's economic news that showed German Jan retail sales falling by the most in 19 months was bearish for the euro.  In addition, Monday's +39% surge in European natural gas prices to a 1-year high threatens to slow economic growth and spur inflation in the Eurozone, negative factors for the euro.

German Jan retail sales fell -0.9% m/m, weaker than expectations of unchanged m/m and the biggest decline in 19 months.

Swaps are discounting a 1% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.

USD/JPY (^USDJPY) on Monday rose by +0.89%.  The yen tumbled to a 3-week low against the dollar on Monday, as a surge in crude oil prices to an 8.25-month high is a negative factor for Japanese economic growth.  Also, higher T-note yields on Monday were bearish for the yen. 

The Japan Feb S&P manufacturing PMI was revised upward by +0.2 to 53.0 from the previously reported 52.8, the strongest pace of expansion in 3.75 years.

The markets are discounting an +4% chance of a BOJ rate hike at the next meeting on March 19.

April COMEX gold (GCJ26) on Monday closed up by +63.70 (+1.21%), and May COMEX silver (SIK26) closed down  -4.438 (-4.76%). 

Gold and silver prices settled mixed on Monday, with gold posting a 1-month high.  The joint US-Israeli attack on Iran has sparked safe-haven demand for precious metals.  Also, Monday's surge in crude oil prices to an 8.25-month high has boosted inflation expectations and increased demand for gold as an inflation hedge.

Precious metals fell from their best levels on Monday, with silver plunging into negative territory, after a rally in the dollar index to a 5-week high sparked long liquidation in metals. Also, higher T-note yields on Monday were bearish for precious metals.

Precious metals also have support amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela.  In addition, US political uncertainty, large US deficits, and uncertainty regarding government policies are prompting investors to cut holdings of dollar assets and shift into precious metals. 

Strong central bank demand for gold is also supportive of prices, following the recent news that bullion held in China's PBOC reserves rose by +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves. 

Finally, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC's December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.

Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high last Friday.  Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 3.5-month low last Monday.