The dollar index (DXY00) experienced a decline of -0.14% on Tuesday. The dollar initially saw gains but turned lower as T-note yields fell following the release of the weekly ADP employment change report, which showed the fewest new jobs added in five weeks. This dovish factor for Fed policy contributed to the dollar’s losses. Furthermore, the dollar extended its decline as stocks rallied, reducing liquidity demand for the dollar.
Despite the overall weakness in the dollar, losses were limited by unexpected growth in Feb pending home sales. Additionally, the ongoing conflict with Iran, now in its eighteenth day, continued to boost safe-haven demand for the dollar.
The ADP weekly employment change for the four weeks ending February 28 revealed a modest increase of +9,000, marking the smallest gain in five weeks and indicating a slowdown in hiring by US employers. On the other hand, US Feb pending home sales defied expectations by rising +1.8% m/m, surpassing the projected -0.6% m/m decline.
The 2-day FOMC meeting commenced on Tuesday, with market expectations leaning towards the Fed maintaining the federal funds target range at 3.50%-3.75%. Despite the Jan core PCE price index standing at 3.1%, well above the Fed’s 2.0% target, the Fed is anticipated to signal a prolonged pause in rate adjustments.
Swaps markets are currently pricing in a 3% probability of a -25 bp rate cut at the FOMC meeting, suggesting cautious optimism among investors. The dollar’s outlook remains uncertain due to expectations of rate differentials, with the FOMC potentially cutting rates in 2026 while the BOJ and ECB are anticipated to raise rates during the same period.
In the forex market, EUR/USD (^EURUSD) saw a gain of +0.30% on Tuesday, benefiting from the dollar’s weakness. However, the euro’s upside was limited by the German Mar ZEW survey expectations of economic growth, which fell more than anticipated to an 11-month low. Furthermore, the +2% increase in crude oil prices on Tuesday posed a negative impact on the Eurozone economy, which heavily relies on energy imports.
On the other hand, USD/JPY (^USDJPY) experienced a decline of -0.03% on Tuesday. The yen gained slight momentum following Japan’s Jan tertiary industry index, which recorded its largest increase in 5.25 years. Lower T-note yields also supported the yen, although gains were offset by the surge in crude oil prices, which adversely affects Japan’s energy-dependent economy.
Threats of currency intervention emerged as a positive factor for the yen after Japanese Finance Minister Satsuki Katayama expressed concerns over recent currency movements. The Japan Jan tertiary industry index exceeded expectations with a rise of +2.5 to 1.7%, marking a significant improvement.
In the commodities market, April COMEX gold (GCJ26) closed up by +6.00 (+0.12%), while May COMEX silver (SIK26) closed down -0.761 (-0.94%) on Tuesday. Precious metals initially saw gains due to a weaker dollar and falling T-note yields, along with strong safe-haven demand amid geopolitical tensions. However, early advances were reversed as stocks rallied, reducing safe-haven appeal for gold and silver. Additionally, the +2% increase in crude oil prices raised inflation prospects, potentially deterring the Fed from cutting rates, which is unfavorable for precious metals prices.
Fund liquidation in precious metals remains a bearish factor, as long holdings in gold and silver ETFs declined recently. Nonetheless, strong central bank demand for gold continues to support prices, exemplified by China’s PBOC boosting its gold reserves for the fifteenth consecutive month.
In conclusion, the financial markets are influenced by a multitude of factors, including economic data, geopolitical tensions, and central bank policies. Investors are closely monitoring developments to navigate through the uncertain landscape and make informed decisions.
