Dollar Gains Ground as Fed Signals Cautious Approach to Rate Cuts
Mixed Signals in the Market Amid Strong Economic Data
The dollar index (DXY00) climbed by +0.36% on Monday, reaching a 2-month high. Support for the dollar came from hawkish remarks by Fed Governor Waller and Minneapolis Fed President Kashkari, who indicated a preference for a gradual pace in reducing interest rates. Furthermore, expectations of less aggressive rate cuts from the Fed gained traction after last week’s US consumer and producer price reports for September surpassed forecasts. The dollar also gained on the back of the yen’s decline, which hit a 2-1/4 month low against the dollar.
Fed Officials Favor Careful Rate Reductions
The comments from Fed officials on Monday reinforced confidence in the dollar, suggesting a deliberate approach to rate cuts. Minneapolis Fed President Kashkari noted that “further modest reductions” in the federal funds rate appear likely in the upcoming quarters. Similarly, Fed Governor Waller remarked that recent data indicates the US economy might not be slowing as much as policymakers would like, allowing them to consider interest rate cuts “with less urgency” than previously indicated during last month’s FOMC meeting.
Market Expectations Point to Mild Rate Changes
Currently, markets are forecasting an 87% chance of a -25 basis point rate cut at the FOMC meeting on November 6-7. The likelihood of a more substantial -50 basis point cut remains at 0% for that meeting.
Euro Weakens Amid Dollar Strength and ECB Speculation
The EUR/USD (^EURUSD) pair fell by -0.30% on Monday, marking a 2-month low. The euro’s decline was largely due to the robust performance of the dollar and growing expectations that the European Central Bank (ECB) will implement a 25 basis point rate cut during its policy meeting this Thursday.
Swaps Reflect High Probability of ECB Rate Cuts
Swaps indicate a 96% chance of a -25 basis point cut by the ECB on October 17 and a 100% probability of the same cut by the December 12 meeting.
Yen Decline Contributes to Dollar Gains
The USD/JPY (^USDJPY) pair increased by +0.41% on Monday as the yen fell to a 2-1/4 month low against the dollar. The stronger-than-expected US economic reports have reduced speculation about aggressive Fed rate cuts, which in turn has buoyed the dollar while exerting downward pressure on the yen.
Market Eyes Potential BoJ Rate Hikes
Swaps show a 2% chance of a +10 basis point rate hike by the Bank of Japan at the upcoming meeting on October 30-31, and a 26% chance for a similar hike on December 18-19.
Precious Metals Face Pressure from Strong Dollar
December gold (GCZ24) closed down -10.70 (-0.40%), while December silver (SIZ24) finished at -0.439 (-1.38%) on Monday. The rally in the dollar index to a 2-month high contributed to the decline in precious metals. Furthermore, remarks from Fed officials supporting a slow approach to rate cuts added to the downward pressure. The recent stock market gains also diminished safe-haven demand for these metals. Silver faced additional headwinds from disappointing trade data out of China, heightening concerns for global economic growth and industrial metals demand.
Middle East Tensions Spark Safe-Haven Demand
Despite the overall decline in precious metals, losses were somewhat limited as tensions in the Middle East fueled safe-haven buying. Additionally, the prospect of an ECB interest rate cut boosts gold’s appeal as a secure investment.
China’s Trade Data Disappoints
In trade news, China’s export growth slowed to +2.4% year-on-year in September, falling short of the anticipated +6.0%. Meanwhile, imports rose by +0.3% year-on-year, below the expected +0.8%. This data presents concerns for the outlook of global growth and demand for industrial metals.
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On the date of publication,
Rich Asplund
did not hold (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data provided herein are intended for informational purposes only. For more details, please view the Barchart Disclosure Policy
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
