The dollar index (DXY00) rose +0.51% on Wednesday. The dollar today recovered from initial losses and rose after February producer prices in the United States rose more than expected, a hawkish factor for the Federal Reserve’s policy. Additionally, signs of escalation in the war with Iran sent stocks tumbling and boosted liquidity demand for the dollar after Iran said it will attack energy infrastructure in Saudi Arabia, Qatar and the United Arab Emirates in retaliation for US and Israeli airstrikes on its South Pars gas field and Asaluyeh oil industry facilities. The dollar peaked on Wednesday afternoon as the FOMC raised its 2026 US GDP and inflation forecasts, and after Fed Chair Powell said there will be no rate cuts unless there is progress on inflation.
US February PPI final demand rose +0.7% MoM and +3.4% YoY, stronger than expectations of +0.3% MoM and +3.0% YoY. February PPI excluding food and energy increased +0.5% mom and +3.9% yoy, stronger than expectations of +0.3% mom and +3.7% yoy, with the +3.9% yoy increase the largest yoy increase in 13 months.
US factory orders in January rose +0.1% mom, right in line with expectations.
As expected, the FOMC voted 11-1 to keep the federal funds target range unchanged at 3.50% to 3.75%, saying, “U.S. economic activity has been expanding at a solid pace and inflation remains somewhat elevated.”
The Federal Reserve increased its 2026 US GDP forecast from 2.3% to 2.4% and raised its 2026 US core PCE projection from 2.5% to 2.7%.
The FOMC kept its federal funds rate projection for the end of 2026 at 3.375%, implying a quarter point (25 bp) interest rate cut this year.
Federal Reserve Chair Powell said higher energy prices will increase overall inflation, and if we don’t see progress to reduce inflation, “we won’t see a rate cut.”
Swap markets are pricing in 0% odds of a -25bp rate cut at the April 28-29 FOMC meeting.
The dollar remains weakened by a poor outlook for interest rate differentials: the FOMC is expected to cut interest rates by at least -25 bps in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bps in 2026.
EUR/USD (^EURUSD) fell -0.57% on Wednesday. The euro gave up an early advance on Wednesday and turned lower as the dollar strengthened following the hawkish US February PPI report. Losses in the euro accelerated on Wednesday after crude oil prices rose on signs of an escalation in the war against Iran after Iran said it would target other Middle East oil infrastructure in retaliation for US and Israeli attacks on its South Pars gas field and Asaluyeh oil industry facilities. Rising crude oil prices are negative for the euro, as higher crude oil prices are bearish for the eurozone economy, which relies heavily on energy imports.
Swaps price in a 2% chance that the ECB will raise rates by +25 bps at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Wednesday rose +0.50%. The yen gave up its gains from the previous night and fell to a 20-month low against the dollar on Wednesday, as the dollar rebounded following a hawkish report on the US February PPI. Additionally, the rise in Treasury yields on Wednesday weighed on the yen. Additionally, the yen was being pressured by higher crude oil and natural gas prices, which are negative for Japan’s economy, which depends on energy imports.
Threats of monetary intervention are limiting the yen’s losses following recent comments from Japanese Finance Minister Satsuki Katayama, who said that recent currency movements are not in line with fundamentals and that officials are fully prepared to respond at any time.
Japanese trade news was mixed for the yen. Japan’s exports in February rose +4.2% year-on-year, stronger than expectations of +1.9% year-on-year. February imports rose +10.2% year-on-year, the most in 13 months, but below expectations of +11.3% year-on-year.
Markets are pricing in a +4% chance of the BOJ raising rates at its next meeting on Thursday.
April COMEX gold (GCJ26) closed Wednesday down -112.00 (-2.24%) and May COMEX silver (SIK26) closed down -2.329 (-2.91%).
Gold and silver prices plummeted on Wednesday, with gold falling to a 1.25-month low and silver to a 1-month low. Wednesday’s hawkish US February PPI report boosted dollar and Treasury yields and sparked a sharp long-term sell-off in precious metals on concerns that harsh price pressures would prevent the Federal Reserve from cutting interest rates. Additionally, precious metals fell after the FOMC kept interest rates unchanged and raised its 2026 US GDP and inflation forecasts, which are hawkish for Federal Reserve policy.
Precious metals continue to see strong safe haven demand as the war against Iran entered its 19th day on Wednesday, with no end in sight. Additionally, uncertainty over US tariffs, US political turmoil, large US deficits, and uncertainty over government policies are driving demand for precious metals as a store of value.
The recent liquidation of precious metals funds is bearish for prices, as long holdings in gold ETFs fell to a 2-month low on Tuesday after hitting a 3.5-year high on February 27. Additionally, long holdings in silver ETFs fell to a 4-month low on Tuesday after reaching a 3.5-year high on December 23.
Strong demand for gold from the central bank supports gold prices, following recent news that bullion held in China’s PBOC reserves increased by +40,000 ounces to 74.19 million troy ounces in January, the 15th consecutive month that the PBOC has increased its gold reserves.
On the date of publication, Rich Asplund had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
