Dollar Rallies as Surging Oil Prices Spark Inflation Fears

The dollar index (DXY00) rallied to a 9.5-month high on Friday and finished up +0.65%.  The dollar rallied on Friday as the war in Iran shows no signs of easing, threatening to keep crude oil prices elevated and prompting the Fed to hold off on cutting interest rates.  Higher crude prices also threaten the European and Japanese economies that rely on energy imports, weakening their currencies against the dollar. 

Friday’s US economic news was mixed for the dollar after Jan personal spending, and the University of Michigan US Mar consumer sentiment index was stronger than expected, but Q4 GDP was revised lower, and Jan capital goods new orders, nondefense ex-aircraft and parts, were weaker than expected.

US Jan personal spending rose +0.4% m/m, stronger than expectations of +0.3% m/m.  Jan personal income rose +0.4% m/m, weaker than expectations of +0.5% m/m.

The US Jan core PCE price index, the Fed’s preferred inflation gauge, rose +3.1% y/y, right on expectations and the highest in 1.75 years.

US Jan capital goods new orders nondefense ex-aircraft and parts were unchanged m/m, weaker than expectations of +0.5% m/m.

US Q4 GDP was revised downward to +0.7% (q/q annualized) from the previously reported +1.4% as Q4 personal consumption was revised lower to +2.0% from the previously reported +2.4%.

The University of Michigan US Mar consumer sentiment index fell -1.1 to 55.5, stronger than expectations of 54.8.

The University of Michigan’s US Mar 1-year inflation expectations were unchanged from Feb at 3.4%, weaker than expectations of an increase to 3.7%.  The Mar 5-10 year inflation expectations unexpectedly fell to 3.2% from 3.3% in Feb, weaker than expectations of an increase to 3.4%.

US Jan JOLTS job openings rose +396,000 to 6.946 million, stronger than expectations of 6.750 million.

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 Friday tumbled to a 7.5-month low and finished down by -0.74%.  The dollar’s strength on Friday weighed on the euro.  Also, this week’s surge in crude oil prices to a 3.75-year high is negative for the Eurozone economy that relies on energy imports, weighing on the euro. 

Swaps are discounting a 5% chance of a +25 bp rate hike by the ECB at its next policy meeting on March 19.

USD/JPY (^USDJPY) on Friday rose by +0.21%.  The yen tumbled to a 20-month low against the dollar on Friday after crude oil prices rallied more than +3%.  The strength in crude oil is bearish for the Japanese economy and the yen.  Also, higher T-note yields on Friday were bearish for the yen.

The markets are discounting a +7% chance of a BOJ rate hike at the next meeting on March 19.

April COMEX gold (GCJ26) on Friday closed down -64.10 (-1.25%), and May COMEX silver (SIK26) closed down -3.769 (-4.43%).

Gold and silver prices sold off sharply on Friday, with silver falling to a 1.5-week low.  Friday’s rally in the dollar index to a 9.5-month high weighed on metals prices.  Precious metals were also under pressure as this week’s surge in WTI crude oil to a 3.75-year high will boost inflationary pressures and reduce expectations of a Fed rate cut.  Silver prices added to their losses on Friday after the US Q4 GDP was revised lower, a negative factor for industrial metals demand.   

Precious metals still have underlying support from safe-haven demand amid the war in Iran, which shows no signs of de-escalation.  Also, uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty are boosting demand for precious metals as a store of value. 

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 4-month low on Thursday.