Dollar Gains on Concerns Over a Lengthy War in Iran

The dollar index (DXY00) on Friday rose by +0.42%.  The dollar moved higher on Friday as weakness in stocks boosted some liquidity demand for the dollar.  Also, the ongoing war in Iran has boosted demand for the dollar as a safe haven.  In addition, higher T-note yields on Friday strengthened the dollar’s interest rate differentials.  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. 

Swaps markets are discounting the odds at 12% 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 Friday fell by -0.31%.  The euro was under pressure on Friday from a stronger dollar.  Also, Friday’s news that showed German Feb producer prices posted their biggest decline in 1.75 years is dovish for ECB policy and negative for the euro.  The euro remained lower after crude oil prices rose more than +2%, a negative factor for the Eurozone economy, as Europe imports most of its energy needs.

German Feb PPI fell -3.3% y/y, weaker than expectations of -2.7% y/y and the biggest decline in 1.75 years.

Hawkish comments on Friday from ECB Governing Council member and Bundesbank President Joachim Nagel were supportive of the euro when he said the ECB may need to consider raising interest rates as soon as next month if price pressures build further due to the Iran war.

Swaps are discounting a 80% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Friday rose by +1.02%.  The yen fell sharply on Friday amid strength in the dollar and higher T-note yields.  The yen added to its losses on Friday after crude oil prices surged by more than +2%, a bearish factor for Japan’s economy, which imports 90% of its energy needs.  Trading volume and activity in the yen were below normal on Friday, as markets in Japan were closed for the Vernal Equinox Day holiday. 

The markets are discounting a +61% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

April COMEX gold (GCJ26) on Friday closed down -30.80 (-0.67%), and May COMEX silver (SIK26) closed down -1.551 (-2.18%).

Gold and silver prices gave up early gains on Friday and turned lower amid a stronger dollar. Also, higher global bond yields on Friday weighed on precious metals prices.  In addition, soaring energy costs from the war in Iran have turned many central banks hawkish this week, with threats to tighten monetary policy, a bearish factor for precious metals.  Losses in precious metals accelerated on Friday after ECB Governing Council member and Bundesbank President Joachim Nagel said the ECB may have to raise interest rates as soon as next month if price pressures build further from the war in Iran.   

Precious metals continue to see strong safe-haven demand as the war against Iran continues, with no end in sight.  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.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 2.5-month low on Thursday after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 6-month low on Thursday 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.