Dollar Climbs and Gold Falls as Weak Stocks Boost Liquidity Demand

The dollar index (DXY00) on Thursday rose by +0.51% and posted a 3.5-month high.  Thursday’s stock slump boosted liquidity demand for the dollar.  Also, higher T-note yields on Thursday have strengthened the dollar’s interest rate differentials.  Thursday’s US economic news was mostly supportive for the dollar as weekly jobless claims rose less than expected and the Jan trade deficit narrowed more than expected, while Jan housing starts unexpectedly rose to an 11-month high.

US weekly initial unemployment claims fell -1,000 to 213,000, showing a stronger labor market than expectations of an increase to 215,000.

US Jan housing starts unexpectedly rose +7.2% m/m to an 11-month high of 1.487 million, stronger than expectations of a decline to 1.341 million.  Jan building permits, a proxy for future construction, fell -5.4% m/m to a 5-month low of 1.376 million, weaker than expectations of 1.410 million.

The US Jan trade deficit shrank to -$54.5 billion, narrower than expectations of -$66.0 billion.

Swaps markets are discounting the odds at 1% for a -25 bp rate cut at the next FOMC policy meeting on March 17-18.

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 Thursday fell by -0.45% due to dollar strength.  Also, the euro was undercut by Thursday’s comments from the European Union’s economy chief, Valdis Dombrovskis, who said the inflation rate could surpass 3% this year and GDP in the Eurozone could be as much as -0.4 points lower if the war in the Middle East causes crude oil prices to remain around $100 per barrel and gas prices stay elevated for an extended period.

Swaps are discounting a 3% chance of a +25 bp rate hike by the ECB at its next policy meeting on March 19.

USD/JPY (^USDJPY) on Thursday rose by +0.30%.  The yen tumbled to an 8-week low against the dollar on Thursday due to surging crude prices, which are negative for Japan’s economy.  Thursday’s higher T-note yields were also bearish for the yen.  Losses in the yen were limited on Thursday following comments from BOJ Governor Ueda, who said forex is a key factor affecting prices and tends to affect inflation more than before. 

The Japan Q1 BSI large all-industry business conditions index fell to 4.4 from 4.9 in Q4.

The markets are discounting a +2% chance of a BOJ rate hike at the next meeting on March 19.

April COMEX gold (GCJ26) on Thursday closed down -53.30 (-1.03%), and May COMEX silver (SIK26) closed down -0.423 (-0.49%).

Gold and silver prices settled lower on Thursday.  Higher global bond yields and a rally in the dollar to a 3.5-month high sparked selling in precious metals.  Gold prices also retreated as Thursday’s +9% surge in crude oil prices boosts inflation expectations and may keep the Fed from cutting interest rates.

However, weakness in stocks fueled safe-haven demand for precious metals, limiting losses in gold and silver.  Also, precious metals have underlying support from safe-haven demand amid the war in Iran. Silver also had support on Thursday after US Jan housing starts unexpectedly rose to an 11-month high, a bullish factor for industrial metals demand. 

Strong central bank demand for gold is also supportive of gold 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. 

Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high on February 27.  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 on February 23.