Dollar Supported by Ongoing US-Iran War

The dollar index (DXY00) on Wednesday rose by +0.22%.  The dollar recovered from early losses on Wednesday and moved higher after Iran said it rejected the latest US peace proposal. Also, Wednesday's US economic news, showing the Feb import price index ex-petroleum posting its biggest increase in 4 years, is hawkish for Fed policy and supportive of the dollar.

The dollar initially moved lower on Wednesday as stocks rallied after the Trump administration stepped up efforts to end the war with Iran and sent Iran a 15-point peace proposal to end the hostilities.  Also, Wednesday's 2% fall in crude oil prices may curb price pressures and allow the Fed to keep cutting interest rates, a bearish factor for the dollar.

US MBA mortgage applications fell -10.5% in the week ended March 20, with the mortgage purchase sub-index down -5.4% and the refinancing mortgage sub-index down -14.6%.  The average 30-year fixed rate mortgage rose +13 bp to 6.43% from 6.30% the prior week.

The US Feb import price index ex-petroleum rose +1.2% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 4 years.

Swaps markets are discounting the odds at 4% 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 Wednesday fell by -0.38%.  The euro was under pressure on Wednesday as business confidence sank in Germany after the German Mar IFO business climate fell to a 13-month low.  Also, dovish comments from ECB President Lagarde undercut the euro when she said the ECB could look through a limited short-lived energy shock from the Iran war. 

The German Mar IFO business climate fell -2.0 to a 13-month low of 86.4.

ECB President Lagarde said it is too early to determine the response to the war and "we will not act before we have sufficient information on the size and persistence of the shock and its propagation." She added that the initial shock may be smaller than in 2022, given a more benign macroeconomic backdrop.

Swaps are discounting a 62% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) on Wednesday rose by +0.48%.  The yen moved lower on Wednesday after Japan's Jan leading index, the CI, was revised lower.  Also, hopes for an end to war in Iran sparked a +2% rally in the Nikkei Stock Index on Wednesday, curbing safe-haven demand for the yen. 

Losses in yen were limited on Wednesday amid a slide in T-note yields and a -2% decline in crude oil prices.  Also, hawkish comments from a BOJ board member in the minutes of the January 30 BOJ meeting were supportive of the yen.

The Japan Jan leading index CI was revised downward by -0.3 to 112.1 from the previously reported 112.4.

According to the minutes of the January 30 BOJ meeting, one policymaker said that the weak yen and higher long-term interest rates largely reflected fundamentals, and the only prescription was for the BOJ to raise the policy interest rate in a timely and appropriate manner.

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 Wednesday closed up +150.30 (+3.41%), and May COMEX silver (SIK26) closed up +3.072 (+4.42%).

Gold and silver prices rallied sharply on Wednesday as crude oil prices fell by more than -2% after the US unveiled a 15-point peace plan to end the war with Iran.  The slump in crude oil prices may keep inflation contained and is dovish for central bank policy and supportive of precious metals. Lower global bond yields on Wednesday were also bullish for precious metals. 

Precious metals also have safe-haven support amid concerns about the escalation of the war in the Middle East.  Saudi Arabia agreed to give the US military access to King Fahd Air Base, and the UAE closed an Iranian-owned hospital and club.  Iran's Middle Eastern neighbors are growing frustrated with Iran, which has responded to US and Israeli attacks by hitting targets in several nearby nations. 

Precious metals continue to see strong safe-haven demand amid the war in Iran, which has entered its 25th day.  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 3.25-month low on Tuesday 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.