Dollar Pressured by Rising Stocks

The dollar index (DXY00) on Tuesday fell by -0.14%.  The dollar gave up overnight gains and turned lower on Tuesday as T-note yields fell after the weekly ADP employment change showed the fewest new jobs added in five weeks, a dovish factor for Fed policy.  The dollar extended its losses on Tuesday after stocks rallied, which curbed liquidity demand for the dollar.

Losses in the dollar were limited after Feb pending home sales unexpectedly increased, and as the war against Iran enters its eighteenth day on Tuesday with no end in sight, boosting safe-haven demand for the dollar.

The ADP weekly employment change for the four weeks ending February 28 increased by +9,000, the smallest increase in five weeks and a sign of a slowdown in hiring by US employers.

US Feb pending home sales unexpectedly rose +1.8% m/m, stronger than expectations of a -0.6% m/m decline.

The 2-day FOMC meeting began on Tuesday, and market expectations are for the Fed to keep the federal funds target range unchanged at 3.50%-3.75%.  With the Jan core PCE price index, the Fed’s preferred inflation gauge, at 3.1%, well above the Fed’s 2.0% target, the Fed is expected to signal an extended pause ahead. 

Swaps markets are discounting the odds at 3% for a -25 bp rate cut at the Tue/Wed 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) on Tuesday rose by +0.30%.  The dollar’s weakness on Tuesday supported gains in the euro.  However, the upside in the euro was limited after today’s economic news showed the German Mar ZEW survey expectations of economic growth fell more than expected to an 11-month low.  Also, Tuesday’s +2% increase in crude oil prices is negative for the euro, as higher crude prices are bearish for the Eurozone economy, which relies heavily on energy imports. 

The German Mar ZEW survey expectations of economic growth fell -58.8 to an 11-month low of -0.5, weaker than expectations of 39.2.

Swaps are discounting a 3% chance of a +25 bp rate hike by the ECB at Thursday’s policy meeting.

USD/JPY (^USDJPY) on Tuesday fell by -0.03%.  The yen moved slightly higher on Tuesday after Japan’s Jan tertiary industry index posted its biggest increase in 5.25 years, a supportive factor for the yen.  Also, lower T-notes yields on Tuesday were bullish for the yen.  Gains in the yen were limited by Tuesday’s +2% increase in crude oil prices, which is negative for Japan’s economy, which relies on energy imports.   

Threats of currency intervention are positive for the yen after Japanese Finance Minister Satsuki Katayama said today that recent currency moves are not in line with fundamentals, and officials are fully prepared to respond at any time.

The Japan Jan tertiary industry index rose +2.5 to 1.7%, stronger than expectations of +0.9% and the biggest increase in 5.25 years.

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

April COMEX gold (GCJ26) on Tuesday closed up by +6.00 (+0.12%), and May COMEX silver (SIK26) closed down -0.761 (-0.94%).

Gold and silver prices gave up early advances on Tuesday and settled mixed.  Tuesday’s rally in stocks reduced safe-haven demand for precious metals. Also, Tuesdays’ +2% rally in crude oil prices boosts inflation prospects that potentially keep the Fed from cutting interest rates, a bearish factor for precious metals. 

Precious metals initially moved higher on Tuesday due to a weaker dollar and falling T-note yields. Also, precious metals continue to see strong safe-haven demand as the war against Iran entered its eighteenth day on Tuesday, with no end in sight.   In addition, 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.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 2-month low on Monday after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 4-month low on Monday 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 +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves.