The dollar index (DXY00) Tuesday recovered from early losses and finished up +0.07%.  The dollar posted a 5-1/2 month high Tuesday based on hawkish Fed comments.  Fed Chair Powell, San Francisco Fed President Daly, and Fed Vice Chair Jefferson said if inflation remains elevated, the Fed will hold interest rates higher for longer.  The dollar also garnered support on Tuesday’s news that US March manufacturing production rose more than expected.  According to federal funds futures contracts, the chance of a Fed rate cut at the June FOMC meeting has fallen to 20% from 66% at the start of the month. 

The dollar on Tuesday initially moved lower after US Mar housing starts and building permits fell more than expected, a dovish factor for Fed policy.  The dollar was also under pressure as stocks stabilized, which curbed liquidity demand for the dollar. 

US Mar housing starts fell -14.7% m/m to a 7-month low of 1.321 million, weaker than expectations of 1.485 million.  Mar building permits, a proxy for future construction, fell -4.3% m/m to an 8-month low of 1.458 million, weaker than expectations of 1.510 million.

US Mar manufacturing production rose +0.5% m/m, stronger than expectations of +0.2% m/m.

Fed Chair Powell said, "Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us." 

Fed Vice Chair Jefferson said, "If incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer."

San Francisco Fed President Daly said Monday evening that there's "no urgency" for the Fed to adjust interest rates.  She said, "The labor market's not giving us any indication it's faltering, and inflation is still above our target, and we need to be confident it is on a path to come down to our target before we would feel the need to react."

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 20% for the following meeting on June 11-12.

EUR/USD (^EURUSD) on Tuesday was unchanged.  The euro recovered from a 5-1/2 month low Tuesday and finished little changed.  Tuesday’s German Apr ZEW report rose more than expected to a 2-year high and was bullish for the euro.  Gains in the euro were limited by dovish comments from ECB President Lagarde and ECB Governing Council member Makhlouf, who said the ECB should be able to cut interest rates at its next meeting in June if the trend in inflation persists.

The German Apr ZEW survey expectations of economic growth rose +11.2 to a 2-year high of 42.9, stronger than expectations of 35.5.

ECB President Lagarde said, "If we don't have a major shock in developments, we are heading towards a moment where we have to moderate the restrictive monetary policy that we have."  That is likely to happen in "reasonably short order."

Swaps are discounting the chances for a -25 bp rate cut by the ECB at 87% for its next meeting on June 6.

USD/JPY (^USDJPY) on Tuesday rose by +0.27%.  The yen on Tuesday extended Monday’s losses to a new 33-year low against the dollar.  Higher T-note yields Tuesday weighed on the yen.  Comments Tuesday from Japanese Finance Minister Suzuki failed to support the yen when he said he was watching currency market moves closely but refrained from declaring whether recent moves by the yen could be considered rapid.   

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 33% for the following meeting on June 14.

June gold (GCM4) on Tuesday closed up +24.80 (+1.04%), and May silver (SIK24) closed down -0.341 (-1.19%).  Precious metals on Tuesday settled mixed.  Gold has safe-haven support on concern about Iran-Israel tensions after Israeli military officials said they have no choice but to respond against Iran for its weekend drone and missile attack against Israel. Precious metals also have support as a store of value after ECB Governing Council member Makhlouf said the ECB should be able to cut interest rates at its next meeting in June.

Tuesday’s rally in the dollar index to a 5-1/2 month high is bearish for metals.  Also, hawkish Fed comments from Fed Chair Powell, San Francisco Fed President Daly, and Fed Vice Chair Jefferson were bearish for precious metals when they said they support holding interest rates steady until inflation falls to target.  In addition, higher global bond yields Tuesday were negative for precious metals. Silver prices were also weighed down by industrial metal demand concerns after US Mar housing starts and building permits fell more than expected, and after China Mar industrial production rose less than expected. 

• Dollar Finds Support on Hawkish Fed Comments
• Dollar Rallies to a 5-Month High on Rising Bond Yields and Weak Stocks
• Dollar Gains as Bond Yields Jump on Strength in US Retail Sales
• Dollar Rallies on Fed Divergence and Heightened Geopolitical Risks