Dollar Gains on Weak Stocks and Hawkish Fed

The dollar index (DXY00) on Wednesday rose by +0.51%.  The dollar recovered from early losses today and turned higher after US Feb producer prices rose more than expected, a hawkish factor for Fed policy.  Also, signs of escalation in the Iran war knocked stocks lower and boosted liquidity demand for the dollar after Iran said it will target energy infrastructure in Saudi Arabia, Qatar, and the UAE in retaliation for US and Israeli airstrikes on its South Pars gas field and its Asaluyeh oil industry facilities.  The dollar raced to its high on Wednesday afternoon when the FOMC raised its US 2026 GDP and inflation forecasts, and after Fed Chair Powell said there will be no Fed rate cut unless there is progress on inflation. 

US Feb PPI final demand rose +0.7% m/m and +3.4% y/y, stronger than expectations of +0.3% m/m and +3.0% y/y.  Feb PPI ex-food and energy rose +0.5% m/m and +3.9% y/y, stronger than expectations of +0.3% m/m and +3.7% y/y, with the +3.9% y/y gain the largest year-on-year increase in 13 months.

US Jan factory orders rose +0.1% m/m, right on expectations.

As expected, the FOMC voted 11-1 to keep the fed funds target range unchanged at 3.50% to 3.75% and said, "US economic activity has been expanding at a solid pace, and inflation remains somewhat elevated."   

The Fed boosted its 2026 US GDP forecast to 2.4% from 2.3% and raised its 2026 US core PCE projection to 2.7% from 2.5%.

The FOMC kept its year-end 2026 federal funds rate projection at 3.375%, implying one quarter point (25 bp) interest rate cut this year.

Fed Chair Powell said higher energy prices will push up overall inflation, and if we don't see progress on lower inflation, we "won't see a rate cut."

Swaps markets are discounting the odds at 0% for a -25 bp rate cut at the April 28-29 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 Wednesday fell by -0.57%.  The euro gave up an early advance on Wednesday and moved lower as the dollar strengthened on the hawkish US Feb PPI report. Losses in the euro accelerated on Wednesday after crude oil prices whipsawed higher on signs of escalation of the war against Iran after Iran said it will target other Middle Eastern oil infrastructure in retaliation for US and Israeli attacks on its South Pars gas field and Asaluyeh oil industry facilities.  The 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. 

Swaps are discounting a 2% chance of a +25 bp rate hike by the ECB at Thursday's policy meeting.

USD/JPY (^USDJPY) on Wednesday rose by +0.50%.  The yen gave up overnight gains and tumbled to a 20-month low against the dollar on Wednesday as the dollar rebounded on a hawkish US Feb PPI report.  Also, higher T-note yields on Wednesday weighed on the yen.  In addition, the yen was being pressured by higher crude oil and natural gas prices, which are negative for Japan's economy, which relies on energy imports.   

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

Japanese trade news was mixed for the yen.  Japan Feb exports rose +4.2% y/y, stronger than expectations of +1.9% y/y.  Feb imports rose +10.2% y/y, the most in 13 months but below expectations of +11.3% y/y.

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

April COMEX gold (GCJ26) on Wednesday closed down by -112.00 (-2.24%), and May COMEX silver (SIK26) closed down -2.329 (-2.91%).

Gold and silver prices plunged on Wednesday, with gold falling to a 1.25-month low and silver falling to a 1-month low.  Wednesday's hawkish US Feb PPI report boosted the dollar and T-note yields and sparked heavy long liquidation in precious metals on concern that the sticky price pressures will keep the Fed from cutting interest rates.  Also, precious metals fell after the FOMC kept interest rates unchanged and raised its 2026 US GDP and inflation forecasts, which are hawkish for Fed policy. 

Precious metals continue to see strong safe-haven demand as the war against Iran entered its nineteenth day on Wednesday, 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 Tuesday after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 4-month low on Tuesday 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.