The dollar index (DXY00) Friday fell by -0.11% on reduced safe-haven demand as stocks rallied sharply on the improved prospects for passage of a US spending bill to avert a government shutdown. The dollar was also undercut by the drop in US consumer sentiment to a 2-1/3 year low, a dovish factor for Fed policy. Also, the euro’s strength weighed on the dollar after a report said Germany’s political parties agreed on a debt package. The dollar saw support as US 5-10 year inflation expectations rose to 32-year high due to tariffs, a hawkish factor for Fed policy.
The University of Michigan US Mar consumer sentiment index fell -6.8 to a 2-1/3 year low of 57.9, weaker than expectations of 63.0.
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The University of Michigan US Mar 1-year inflation expectations indicator unexpectedly rose to a 2-1/3 year high of +4.9%, higher than expectations of no change at +4.3%. The Mar 5-10 year inflation expectations indicator unexpectedly rose to a 32-year high of +3.9% versus expectations of a decline to +3.4%.
The markets are discounting the chances at 1% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
EUR/USD (^EURUSD) rose by +0.26%. The euro saw support after Handelsblatt reported that German chancellor-in-waiting Merz reached an agreement with the Green party on a fiscal reform package for large investments in infrastructure and defense, which boosted German bund yields and strengthened the euro’s interest rate differentials. The euro also garnered support from hawkish comments from ECB Governing Council member Holzmann, who said he supports pausing ECB rate cuts next month. Friday’s downward revision to the German Feb CPI was a bearish factor for the euro.
The German Feb CPI (EU harmonized) was revised downward to +0.5% m/m and +2.6% y/y from the previously reported +0.6% m/m and +2.8% y/y.
ECB Governing Council member Holzmann said interest rates in the Eurozone are already at neutral levels, and he supports pausing ECB rate cuts next month. He added that a resurgence in inflation is the greater risk, and higher European spending could force the ECB to hike interest rates.
Swaps are discounting the chances at 47% for a -25 bp rate cut by the ECB at the April 17 policy meeting.
USD/JPY (^USDJPY) rose by +0.49%. The yen was under pressure from higher T-note yields. Also, Friday’s strength in global equity markets reduced safe-haven demand for the yen. Losses in the yen were limited after Japan’s largest union won its biggest wage increase in more than three decades, a hawkish factor for BOJ policy.
Japan’s largest labor union, Rengo, said its workers secured an average wage increase of 5.46% for the coming fiscal year, the most since 1991, signaling sustained wage growth that could prompt the BOJ to keep raising interest rates.
April gold (GCJ25) Friday closed up +9.80 (+0.33%), and May silver (SIK25) closed up +0.127 (+0.37%). April gold Friday posted a contract high, and the March nearest-futures gold contract (H25) posted a record high of $3,004.80 an ounce. Silver rose to a 4-1/2 month high.
Precious metals saw support Friday from a weaker dollar and ongoing safe-haven demand tied to the trade war. The US imposed 25% tariffs this week on Canadian and Mexican goods and doubled the tariff on Chinese goods to 20% from 10%, and China, the European Union, and Canada retaliated with tariffs of their own on US goods.
Precious metals fell back from their best levels after the University of Michigan’s US March inflation expectations indicator unexpectedly rose, a hawkish factor for Fed policy. Also, higher global bond yields Friday were bearish for precious metals. In addition, Friday’s stock rally reduced safe-haven demand for precious metals. Silver prices were also under pressure because of concern that the escalation of tariffs will derail economic growth and demand for industrial metals.
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