Dollar Gains Momentum on FOMC Hawkish Signals and Strong US Data

The US dollar surged recently, gaining 0.57% as the FOMC’s latest policy signals reinforced expectations for a more hawkish monetary policy stance. The currency advanced on the back of robust economic indicators and shifted market expectations regarding interest rate adjustments, creating a favorable environment for dollar appreciation against major currency pairs.

Economic Data Boosts Dollar as FOMC Signals Shift

US economic releases proved stronger than anticipated, providing substantial support for dollar strength. Capital goods orders (excluding defense and aircraft) expanded 0.6% month-over-month, surpassing forecasts of 0.3%. Housing starts climbed 6.2% month-over-month to a five-month peak of 1.404 million units, outperforming expectations of 1.304 million. Building permits—a leading indicator for future construction activity—jumped 4.2% month-over-month to a nine-month high of 1.448 million, above the anticipated 1.400 million.

Manufacturing production also demonstrated strength, advancing 0.6% month-over-month, exceeding expectations of 0.4% and marking the largest monthly increase in 11 months. Higher Treasury yields accompanied these data releases, further reinforcing the dollar’s interest rate advantage relative to other major currencies. Meanwhile, US mortgage applications rose 2.8% during the week ended mid-February, though purchase-related applications declined 2.7% while refinancing activity increased 7.1%. The average 30-year fixed mortgage rate fell 4 basis points to 6.17%.

FOMC Minutes Amplify Market Rate Expectations

The FOMC meeting minutes from late January conveyed a notably hawkish tone, shifting market sentiment regarding future interest rate adjustments. Several policy officials indicated openness to a “two-sided description” of rate decisions, signaling that upward adjustments to the federal funds rate could be warranted if inflation persists above the central bank’s target. This messaging intensified dollar buying pressure, as investors reassessed prior expectations for rate cuts.

Swaps markets currently reflect only a 6% probability of a 25 basis point rate reduction at the next policy decision in mid-March. In contrast, markets project approximately 50 basis points of rate cuts over the full year 2026, reflecting the Fed’s longer-term easing bias despite near-term hawkish signals from the FOMC. This policy outlook contrasts sharply with other major central banks, where rate trajectories remain divergent.

Currency Markets Reflect Central Bank Policy Divergence

The euro weakened substantially, finishing down 0.60% as the dollar’s strength and shifting FOMC expectations pressured the single currency. Additional headwinds for the euro emerged following reports that European Central Bank President Christine Lagarde may step down before her term expires in October 2027. Economic confidence indicators also deteriorated, with Germany’s ZEW economic expectations index unexpectedly declining 1.3 points to 58.3, missing forecasts for an increase to 65.2.

Swap contracts suggest only a 3% chance of a 25 basis point ECB rate cut at the next policy meeting in mid-March, indicating markets expect the ECB to maintain its steady stance despite eurozone economic headwinds. The yen experienced significant depreciation, declining 0.97% as Japanese equity markets rallied over 1%, reducing safe-haven demand for the currency. Higher US Treasury yields and the dollar’s broad strength simultaneously undermined the yen’s appeal.

However, divergent central bank policy trajectories may provide underlying support to the yen in the medium term. Market participants anticipate Bank of Japan rate increases in the near term, contrasting with the Fed’s relatively steady or gradually easing approach. Recent Japanese trade data presented mixed signals—exports surged 16.8% year-over-year (the strongest in three years), exceeding forecasts of 13.0%, while imports unexpectedly contracted 2.5% year-over-year compared to expectations of a 3.5% increase. Swap markets currently discount only a 12% probability of a BOJ rate increase at its upcoming policy meeting.

Precious Metals Rally Despite Dollar Strength

Gold and silver prices advanced sharply, with April COMEX gold futures closing up 2.11% and March COMEX silver surging 5.52%, recouping most of the prior day’s losses. Safe-haven demand for precious metals intensified amid persistent uncertainty surrounding US trade policies and geopolitical tensions spanning Iran, Ukraine, the Middle East, and Venezuela. US political uncertainty, elevated government deficits, and concerns about policy direction continue to motivate investors to reduce dollar allocations and shift capital into precious metals as alternative stores of value.

Central bank demand provides additional support, particularly following recent announcements that China’s People’s Bank of China expanded its gold reserves by 40,000 ounces to 74.19 million troy ounces in January—the fifteenth consecutive month of reserve increases. Improved financial system liquidity, driven by the Federal Reserve’s December announcement of $40 billion monthly injections into the US financial system, has similarly bolstered precious metals demand.

Market participants should note that precious metals experienced pronounced volatility following President Trump’s announcement in late January regarding the nomination of Keven Warsh as the new Federal Reserve Chair. As a hawkish policy advocate believed to be less supportive of significant interest rate reductions, Warsh’s potential appointment triggered substantial liquidation of long precious metals positions. Recent price volatility has prompted global trading exchanges to increase margin requirements for gold and silver, compounding selling pressure through forced liquidations.

Fund positioning remains notably supportive despite recent weakness. Gold exchange-traded fund holdings climbed to a 3.5-year high in late January, though silver ETF positions hit a 3.5-year high in late December before recent liquidation activity reduced holdings to a 2.5-month low in early February. The interplay between safe-haven demand, geopolitical risks, and policy expectations will likely continue shaping precious metals trajectories as markets navigate shifting FOMC policy guidance and international political developments.