Dollar Advances Amid Concerns About Escalation of the Iran War

The dollar index (DXY00) on Tuesday rose by +0.42%.  The dollar moved higher on Tuesday as the ongoing war with Iran drags on, boosting safe-haven demand for the dollar.  Also, Tuesday's +4% jump in crude oil prices may stoke inflation and prompt the Fed to tighten monetary policy, a supportive factor for the dollar.  The dollar added to its gains after the Mar S&P manufacturing PMI unexpectedly increased.

Gains in the dollar accelerated on Tuesday amid concerns about the escalation of the Iran war.  The Wall Street Journal reported that Saudi Arabia and the United Arab Emirates (UAE) have taken steps toward joining the Iran war, potentially signaling an escalation of the fighting.  The Wall Street Journal also reported that the US is considering deploying a brigade combat team of about 3,000 from the Army's 82nd Airborne Division to the Middle East.

US Q4 nonfarm productivity was left unrevised at +1.8%, but Q4 unit labor costs were revised upward to +4.4% from +2.8%, stronger than expectations of +3.6%.

The US rose +0.8 to 52.4, stronger than expectations of a decline to 51.5.

The US Mar Richmond Fed manufacturing survey of current conditions rose +10 to a 13-month high of 0, better than expectations of -8.

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 Tuesday fell by -0.20%.  The euro was under pressure on Tuesday from a stronger dollar.  Also, Tuesday's +4% jump in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs.  Losses in the euro were limited after the Eurozone Mar S&P manufacturing PMI unexpectedly expanded at the fastest pace in 3.75 years.

The Eurozone Mar S&P manufacturing PMI unexpectedly rose +0.6 to 51.4, stronger than expectations of a decline to 49.6 and the strongest pace of expansion in 3.75 years.  The Mar S&P composite PMI fell -1.4 to a 10-month low of 50.5, weaker than expectations of 51.0.

Eurozone Feb new car registrations rose +1.4% y/y to 865,000.

ECB Governing Council member Boris Vujcic, who will become ECB Vice President in June, said the ECB must be "very agile and vigilant" to keep prices in check as the war in Iran brings stagflation risks closer.

Swaps are discounting an 86% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Tuesday rose by +0.33%.  The yen was under pressure Tuesday from a stronger dollar. Also, Tuesday's Japanese economic news weighed on the yen after the Feb National CPI rose less than expected and the Mar S&P manufacturing PMI declined, both of which were dovish for BOJ policy.  The yen remained lower on Tuesday as T-note yields rose.

Japan's Feb national CPI rose +1.3% y/y, weaker than expectations of +1.5% y/y and the smallest pace of increase in nearly 4 years.  The Feb national CPI ex-fresh food and energy rose +2.5% y/y, weaker than expectations of +2.6% y/y and the smallest pace of increase in 13 months.

The Japan Mar S&P manufacturing PMI fell by -1.6 to 51.4.

The markets are discounting a +59% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

April COMEX gold (GCJ26) on Tuesday closed down -5.30 (-0.12%), and May COMEX silver (SIK26) closed up +0.214 (+0.31%).

Gold and silver prices settled mixed on Tuesday.  Dollar strength and higher T-note yields on Tuesday were bearish for precious metals. In addition, Tuesday's +4% jump in WTI crude oil prices may boost inflationary pressures and prompt the world's central banks to tighten monetary policy, a bearish factor for precious metals. Gold prices were also weighed down on Tuesday after Turkey said it may tap its $135 billion gold reserves to support the sinking lira.   

Losses in precious metals were limited on Tuesday on concerns about the escalation of the war in the Middle East, boosting safe-haven demand for precious metals.  Silver prices also found support on Tuesday on signs of strength in global manufacturing activity, after the Eurozone Mar S&P manufacturing PMI unexpectedly expanded at the strongest pace in 3.75 years, and the US Mar S&P manufacturing PMI unexpectedly rose.

Precious metals continue to see strong safe-haven demand amid the war in Iran.  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 3-month low on Monday after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 6.25-month low last Friday 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.