Dollar and Precious Metals Slump on Hawkish Central Banks

The dollar index (DXY00) on Thursday fell by -0.75%.  The dollar was under pressure Thursday after the British pound, the euro, and the Japanese yen all rallied following hawkish comments from the BOE, ECB, and BOJ on the inflationary effects of soaring energy prices from the war in Iran.  Losses in the dollar accelerated on Thursday after the US Jan new home sales fell more than expected to a 3.25-year low.

Thursday's stock market weakness boosted some liquidity demand for the dollar.  Also, Thursday's US economic news on weekly jobless claims and the Mar Philadelphia Fed business outlook survey were hawkish for Fed policy.  The dollar also has carryover support from Wednesday, when Fed Chair Powell said there will be no Fed rate cut unless there is progress on inflation. 

US weekly initial unemployment claims unexpectedly fell -8,000 to a 9-week low of 205,000, showing a stronger labor market than expectations of an increase to 215,000.

The Mar US Philadelphia Fed business outlook survey unexpectedly rose by +1.8 to a 6-month high of 18.1, beating expectations of a decline to 8.0.

US Jan new home sales fell -17.6% m/m to a 3.25-year low of 587,000, weaker than expectations of 722,000.

Swaps markets are discounting the odds at 6% for a +25 bp rate hike 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 Thursday rallied to a 1-week high and rose by +1.40%.  The euro rallied sharply on Thursday amid a weaker dollar.  Also, soaring European bond yields have strengthened the euro's interest rate differentials after the 10-year German Bund yield rose to a 2.25-year high Thursday at 3.011%.   The euro raced to its high on Thursday afternoon when crude oil prices gave up a sharp advance and turned lower.  

Negative factors for the euro on Thursday included the ECB's action to cut its 2026 Eurozone GDP forecast and raise its Eurozone 2026 inflation forecast.  Also, Thursday's surge in European natural gas prices to a 3-year high is bearish for the euro and the Eurozone economy, which relies heavily on energy imports. 

The ECB, as expected, kept the deposit facility rate unchanged at 2.00% and said the Iran war poses upside inflation risks and downside risks to economic growth.

The ECB cut its 2026 Eurozone GDP forecast to 0.9% from 1.2% in December and raised its 2026 inflation forecast ex-food and energy to 2.3% from 2.2%.

Swaps are discounting a 63% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Thursday fell by -1.43%.  The yen rallied sharply to a 1-week high against the dollar on Thursday amid dollar weakness.  Also, Thursday's upward revision to Japan's Jan industrial production to the most in 3.5 years is bullish for the yen.  In addition, hawkish comments from BOJ Governor Ueda boosted the yen as he said that soaring energy prices from the war in Iran may prompt the BOJ to raise interest rates at its next policy meeting in April.  The yen raced to its high on Thursday afternoon after crude oil prices gave up sharp gains and turned lower.

Japan's Jan industrial production was revised upward to 4.3% m/m from the previously reported +2.2% m/m, the largest increase in 3.5 years.

Japan Jan core machine orders fell -5.5% m/m, a smaller decline than expectations of -9.6% m/m.

As expected, the BOJ voted 8-1 to keep the overnight call rate unchanged at 0.75% and said, "Risks to the outlook include the future course of the situation in the Middle East as well as developments in crude oil prices."

BOJ Governor Ueda said that downward pressure on the economy from the war in Iran would likely be temporary, but "even if economic growth were to decline, if that development is temporary and there's not so much impact on the trajectory of the price trend, then of course it will be possible to raise interest rates."

The markets are discounting a +62% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

April COMEX gold (GCJ26) on Thursday closed down by -290.50 (-5.93%), and May COMEX silver (SIK26) closed down -6.377 (-8.22%).

Gold and silver prices plunged for a second day on Thursday, with gold and silver sinking to 6-week lows.  Comments on Thursday from several of the world's central banks that the Iran war poses upside inflation risks pushed global bond yields sharply higher and fueled speculation that the central banks may pursue tighter monetary policy, a bearish factor for precious metals.

Losses in silver prices accelerated on Thursday after the ECB cut its 2026 Eurozone GDP forecast and after US Jan new home sales fell more than expected to a 3.25-year low, bearish factors for industrial metals demand. 

Precious metals continue to see strong safe-haven demand as the war against Iran entered its twentieth day today, 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 Wednesday 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.