Dollar Moves Higher as FOMC Keeps Interest Rates Unchanged

The dollar index (DXY00) Wednesday rose by +0.25%.  The dollar rose moderately on Wednesday after the FOMC kept interest rates unchanged as expected.  The dollar also found support after the FOMC raised its core inflation forecast for this year, a hawkish factor for Fed policy. 

The dollar fell back from its best levels Wednesday afternoon when the Fed’s dot-plot still projected two 25 bp rate cuts by the end of this year.  Also, the FOMC cut its US 2025 GDP forecast and raised its year-end US unemployment estimate, which is a bearish factor for the dollar.  In addition, the FOMC said it would slow the pace of runoff of its balance sheet starting next month, a dovish facto for Fed policy.  The rebound in stocks Wednesday reduced some liquidity demand for the dollar.

 The FOMC, as expected, kept the federal funds rate target unchanged at 4.25%-4.50%.  The post-meeting statement said, “uncertainty around the economic outlook has increased, and removed language saying risks to achieving employment and inflation goals “are roughly in balance.”

The FOMC maintained its “dot plot” of interest rate projections unchanged from December, projecting a year-end fed funds target rate of 3.88%, which implies two 25 bp interest rate cuts this year.  The FOMC also said it would slow the pace of runoff of its securities holdings beginning April by reducing the monthly cap on Treasury securities redemption from $25 billion to $5 billion and will maintain the monthly redemption cap on agency debt and mortgage-backed securities at $35 billion. 

The FOMC cut its 2025 US GDP forecast to 1.7% from a December forecast  2.1% and raised its US 2025 core inflation forecast to 2.8% from 2.5%. The FOMC also raised their 2025 year-end US unemployment estimate to 4.4% from 4.3%.

Fed Chair Powell said the US economy is strong overall, and the Fed doesn’t need to be in a hurry to adjust its policy stance due to heightened economic uncertainty.

The markets are discounting the chances at 18% for a -25 bp rate cut after the May 6-7 FOMC meeting.

EUR/USD (^EURUSD) Wednesday fell by -0.45%.  The euro was under pressure on Wednesday due to a rebound in the dollar.  Also, EUR/USD was undercut after Eurozone Q4 labor costs eased, and after Eurozone Feb CPI was revised downward, dovish factors for ECB policy.  In addition, Wednesday’s decline in the 10-year German bund yield to a 2-week low has weakened the euro’s interest rate differentials.

Eurozone Feb CPI was revised downward by -0.1 to 2.3% y/y from the previously reported 2.4% y/y.

Eurozone Q4 labor costs eased to +3.7% y/y from +4.5% in Q3, the smallest pace of increase in more than two years.

Swaps are discounting the chances at 56% for a -25 bp rate cut by the ECB at the April 17 policy meeting.

USD/JPY (^USDJPY) Wednesday fell by -0.47%.  The yen on Wednesday recovered from a 2-week low against the dollar and rallied moderately as short-covering emerged after T-note yields turned lower.  The yen also garnered support Wednesday on hawkish comments from BOJ Governor Ueda, who said the BOJ will raise interest rates if its economic outlook is realized. 

The yen on Wednesday initially moved lower after the BOJ kept interest rates unchanged following its policy meeting.  The yen was also under pressure from Wednesday’s weaker-than-expected Japanese economic news on trade and Jan core machine orders. 

Japan Jan core machine orders fell -3.5% m/m, weaker than expectations of -0.1% m/m, and the biggest decline in 14 months.

Japan’s trade news was weaker than expected as Feb exports rose +11.4% y/y, weaker than expectations of +12.6% y/y.  Also, Feb imports unexpectedly fell -0.7% y/y versus expectations of a +0.8% y/y increase.

The BOJ kept its overnight call rate unchanged at 0.50%, as expected, and cited worries over the potential impact of US tariff policies.

BOJ Governor Ueda said the BOJ will raise interest rates if its economic outlook is realized and that “exchange rate developments are, compared to the past, more likely to affect prices.”

April gold (GCJ25) Wednesday closed up +0.40 (+0.01%), and May silver (SIK25) closed down -0.613 (-1.76%).  Precious metals Wednesday settled mixed with April gold posting a contract high and nearest-futures (H25) gold posting an all-time high of $3,043.00 an ounce.  Precious metals are supported by an increase in safe-haven demand due to ramped-up geopolitical risks in the Middle East after Israel launched a series of airstrikes across Gaza, ending a two-month ceasefire with Hamas, and after the US launched strikes on Yemen’s Houthi rebels. Also, the ongoing trade war has boosted the safe-haven demand for precious metals.  In addition, Wednesday’s economic news showed an easing of wage pressures in Eurozone Q4 labor costs and the downward revision to Eurozone Feb CPI, which are dovish factors for ECB policy.  Fund buying of gold supports prices after long gold positions in ETFs rose to a 17-month high Tuesday. 

Limiting gains in precious metals Wednesday was a stronger dollar.  Also, higher T-note yields on Wednesday undercut precious metals.  In addition, Wednesday’s stock recovery reduced safe-haven demand for precious metals.  Silver is under pressure from Wednesday’s Japanese economic reports that showed weaker-than-expected Feb trade news and the largest decline in Jan core machine orders in 14 months, negative factors for industrial metals demand.  Finally, concerns that US trade policies will undercut economic growth that reduces demand for industrial metals are negative for silver prices. 

Gold prices jumped more than $15.00 an ounce in post-market trading Wednesday afternoon when the FOMC kept interest rates unchanged but projected two 25 bp rate cuts by the end of the year. The FOMC also said it would slow the pace of runoff of its balance sheet starting next month, a bullish factor for precious metals.