Dollar Index Surges as Economic Outlook Shifts
The dollar index (DXY00) experienced a notable increase of +0.50% on Monday, reaching its highest level in over four months. This boost came after hawkish remarks from Minneapolis Fed President Neel Kashkari, who indicated that robust US economic performance and increased productivity might lead the Federal Reserve to consider fewer rate cuts than previously anticipated. Additionally, the dollar extended its post-election rally from last week, fueled by predictions that Treasury yields will rise amid inflationary pressures linked to President-elect Trump’s pro-tariff stance.
In his comments on Saturday, Kashkari suggested that the combination of a strong economy and productivity growth could sway policymakers toward a less aggressive approach to future interest rate cuts.
Market Predictions for December Rate Cuts
Current market expectations assign a 65% likelihood for a -25 bp rate cut during the upcoming FOMC meeting on December 17-18.
Euro Declines Amid ECB Concerns and Political Turmoil
The EUR/USD (^EURUSD) pair fell by -0.60% on Monday, hitting a six-and-a-half-month low. This drop was primarily due to the stronger dollar, compounded by dovish remarks from European Central Bank (ECB) officials. ECB Governing Council member Robert Holzmann expressed there is “no reason” for the ECB to refrain from cutting interest rates in December. Meanwhile, fellow council member Yannis Stournaras suggested that interest rates could approach 2% by next September.
Political instability in Germany also weighed on the euro. Following the dismissal of Finance Minister Christian Lindner, Chancellor Olaf Scholz has called for a snap election next January, undoing the ruling coalition’s majority in parliament.
While Holzmann added that a rate cut isn’t guaranteed, the swaps market fully prices in a -25 bp reduction from the ECB at their meeting on December 12 and suggests a 21% chance for a -50 bp cut.
Yen Under Pressure Following Economic Data
The USD/JPY (^USDJPY) rose by +0.72% on Monday as the yen faced pressure from disappointing economic data. The Eco-Watchers Survey for Japan in October revealed an outlook drop to 48.3, below expectations of 49.2. Comments from the Bank of Japan’s (BOJ) recent policy meeting highlighted a cautious approach towards interest rate hikes amid ongoing domestic and global uncertainties.
Precious Metals Decline Amid Stronger Dollar
In the precious metals market, December gold (GCZ24) closed down -77.10 (-2.86%), and December silver (SIZ24) fell -0.836 (-2.66%). Both metals hit one-month lows as the dollar index surged. The rally in the S&P 500 to record highs diminished safe-haven demand for these commodities. Additionally, Kashkari’s remarks regarding the Fed’s economic outlook pressured gold prices, since heightened tariffs under a Trump administration could impact global trade, negatively influencing industrial metal demand.
Nevertheless, gold may still see continued demand as a hedge against inflation, especially with Republicans likely regaining control of Congress, enabling the new administration to implement a lower tax and higher tariff agenda. Ongoing geopolitical tensions in the Middle East are also keeping interest in precious metals high.
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On the date of publication, Rich Asplund did not have any positions in the securities mentioned in this article. All information and data in this article are strictly for informational purposes. For more details, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not reflect the views of Nasdaq, Inc.
