The dollar index (DXY00) rose by +0.13% on Wednesday, adding to Tuesday’s +0.45% gain. The dollar found support from a fresh U.S. tariff threat and hawkish FOMC minutes. However, its gains were limited by a -2 bp decline in the 10-year Treasury note yield.
The FOMC minutes from the January 28-29 meeting, released on Wednesday afternoon, were hawkish, as they indicated that the FOMC has paused its rate-cut cycle until inflation shows improvement. The minutes stated, “Participants indicated that, provided that the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.” The minutes also noted that, “many participants stated that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.”
At its January 28-29 meeting, the FOMC left its federal funds target range unchanged at 4.25%-4.50%, holding steady after a total 100 bp rate cut in the second half of 2024. The market is currently pricing in a total rate cut of -37 bp by the end of 2025.
The market is discounting a 2% probability of a -25 bp rate cut at the next FOMC meeting on March 18-19.
On Wednesday, the dollar also found support from President Trump’s announcement of a new set of tariffs, which could be inflationary and further reinforce hawkish Fed policy. On Tuesday night, President Trump stated that he is likely to impose a 25% tariff on U.S. auto, semiconductor, and pharmaceutical imports by April 2. Trump mentioned that the tariffs would be delayed until April 2 to allow companies time to shift production to the U.S. and avoid being impacted by the new import tariffs.
These new tariffs would be added to the previously announced 25% tariffs on steel and aluminum, set to take effect in March. Additionally, the administration will implement “reciprocal tariffs” on a country-by-country basis, which will be calculated and enacted by April 1. Trump has also announced a 10% import tariff on U.S. imports from China and 25% tariffs on Canada and Mexico, although these have been postponed until at least March 4.
U.S. Housing Data Weakens
U.S. January housing starts declined by -9.8% to 1.366 million, weaker than expectations for a drop to 1.390 million. This followed a +16.1% surge in December, reaching 1.515 million units.
Meanwhile, January building permits rose by +0.1% to 1.483 million, stronger than expectations of a decline to 1.460 million.
EUR/USD Weakens Amid US Tariff Concerns and ECB Policy
EUR/USD (^EURUSD) fell by -0.19% on Wednesday. The euro was pressured by concerns over US tariffs after President Trump announced sectoral tariffs on automobiles, semiconductors, and pharmaceuticals, which could further weaken the Eurozone economy.
However, the euro found support from hawkish comments released on Wednesday by ECB Executive Board Member Isabel Schnabel, who indicated that the ECB is approaching the point of pausing or halting its rate-cut policy. She stated that in the next meeting, where the ECB is expected to cut rates by another -25 bp, ECB officials should consider removing language from their post-meeting statement that implies a tendency towards further rate cuts.
The euro also gained support from rising European bond yields this week, driven by expectations that European defense spending will need to increase significantly as Europe is increasingly forced to defend itself against Russian aggression, while US-Russia relations begin to thaw.
Swap markets are currently pricing in a 97% chance of a -25 bp rate cut by the ECB at the March 6 policy meeting.
USD/JPY Declines Amid Expectations of BOJ Rate Hikes
USD/JPY (^USDJPY) fell by -0.37%. The yen found support from recent hawkish comments by top Japanese officials. Japanese Prime Minister Ishiba said last Thursday that Japan’s economy is on track to achieve sustainable inflation backed by wage growth, increasing the likelihood of rate hikes. The market is currently pricing in a total +40 bp increase in the BOJ’s benchmark interest rate by the end of the year.
Gold and Silver Prices Decline Amid Hawkish Fed Policy and Stronger US Dollar
April gold futures (GCJ25) closed down -12.90 (-0.44%) on Wednesday, while March silver (SIH25) fell by -0.330 (-0.99%). Gold prices weakened due to the hawkish FOMC minutes and a moderately stronger US dollar. Additionally, Wednesday’s weaker-than-expected US housing starts report negatively impacted silver and industrial metal prices.
However, gold prices received support on Tuesday when Goldman Sachs raised its year-end gold price target to $3,100 per ounce, driven by strong demand from central banks and inflows into gold ETFs. Goldman also noted that economic policy uncertainty stemming from investor concerns over tariffs provided additional support for gold prices.
