The dollar index (DXY00) on Friday rose by +0.01%.  The dollar on Friday gave up most of an overnight advance and finished little changed.  The dollar spiked higher in overnight trade after US officials said Israel launched a retaliatory air strike against Iran in response to Iran’s rocket and drone attack on Israel last weekend.  However, the dollar fell back from its best levels on signs the damage was minimal, and an Iranian military official downplayed the attack.  Lower T-note yields Friday also weighed on the dollar.   

Liquidity demand for the dollar increased Friday after the S&P 500 tumbled to a 1-3/4 month low.  The dollar is also supported as Fed rate-cut expectations have dropped sharply due to recent strength in US economic news and hawkish Fed comments.  Swap markets are discounting the chance of a Fed rate cut at the June FOMC meeting at 19%, much less than the 66% chance the market had priced in earlier this month.

Hawkish comments on Friday from Chicago Fed President Goolsbee supported the dollar when he said, "So far in 2024, progress on inflation has stalled, and it makes sense to wait and get more clarity" before cutting interest rates.

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 19% for the following meeting on June 11-12.

EUR/USD (^EURUSD) on Friday rose by +0.08%.  The euro recovered from overnight losses and posted modest gains. Friday’s stronger-than-expected German Mar producer price report is hawkish for ECB policy and boosted the euro. Also, Friday’s jump in the 10-year German bund yield to a 4-1/2 month high strengthened the euro’s interest rate differentials.  Gains in the euro were limited after ECB President Lagarde said the disinflation process in the Eurozone has continued and growth prospects remain subpar by historical standards.

German Mar PPI rose +0.2% m/m and fell -2.9% y/y, stronger than expectations of +0.1% m/m and -3.3% y/y.

ECB Governing Council member Simkus said the Eurozone can afford a "less restrictive monetary policy stance, and I think three rate cuts by the ECB this year is consistent with the baseline.  Whether we'll have four will depend on the data."

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 Friday fell by -0.05%.  The yen moved slightly higher Friday due to increased safe-haven demand from escalating tensions between Israel and Iran and the fall in the Nikkei Stock Index to a 2-1/4 month low.  A decline in T-note yields Friday was also supportive of the yen.  Gains in the yen were limited on Friday’s weaker-than-expected Japan Mar national CPI report, which is dovish for BOJ policy. 

Japan's Mar national CPI eased to +2.7% y/y from +2.8% y/y in Feb, weaker than expectations of no change at +2.8% y/y.  Mar national CPI ex-fresh food and energy eased to +2.9% y/y from +3.2% y/y in Feb, weaker than expectations of +3.0% y/y.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 1% for the April 26 meeting and 35% for the following meeting on June 14.

June gold (GCM4) Friday closed up +15.8 (+0.66%), and May silver (SIK24) closed up +0.464 (+1.62%).  Precious metals Friday posted moderate gains.  Precious metals spiked sharply higher Friday in overnight trade on increased safe-have demand after US officials said Israel launched an overnight airstrike against Iran.  However, precious metals gave up most of their advance after an Iranian military official downplayed the severity of the incidents.  Hawkish comments from Chicago Fed President Goolsbee undercut precious metals when he said progress on inflation has stalled, and it makes sense to wait before cutting interest rates.  Gold prices were also under pressure as funds continued to liquidate their long gold positions after long gold holdings in ETFs fell to a 4-1/2 year low Thursday. 

Lower T-note yields Friday supported precious metals.  Also, dovish comments today from ECB Governing Council member Simkus were positive for precious metals demand as a store of value when he said the Eurozone could afford a "less restrictive monetary policy stance,” and he supports three or four rate ECB rate cuts this year.  Silver had carryover support from Friday’s rally in copper prices to a 1-3/4 year high.

• Stocks Fall Back on Middle East Tensions and Chip Stock Weakness
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• Dollar Climbs as T-Note Yields Rise and Stocks Fall
• Dollar Gains on Higher T-Note Yields