Dollar Surges to New High as Inflation Concerns Rise
Market Reactions and Federal Reserve Insights
The dollar index (DXY00) climbed by +0.47% on Tuesday, reaching a high not seen in over four months. Strengthening U.S. Treasury yields played a significant role in boosting the dollar’s attractiveness to investors. Supporting this trend, Richmond Fed President Barkin noted that the U.S. economy appears “pretty good,” affirming confidence in the currency’s performance. Additionally, the dollar continued its rally from last week’s elections, amid speculation that rising T-note yields will coincide with increasing inflation tied to President-elect Trump’s pro-tariff stance.
Barkin emphasized the Fed’s readiness to adjust its policies in response to evolving economic conditions. In parallel, Minneapolis Fed President Kashkari warned that only unexpected inflation could potentially halt a rate cut at the upcoming December meeting. Current market expectations suggest a 62% probability of a -25 basis point cut during the Federal Open Market Committee (FOMC) meeting on December 17-18.
Euro Weakens Amid Economic Concerns
On the other side of the Atlantic, the EUR/USD (^EURUSD) fell by -0.38%, marking a new low for the euro in nearly seven months. The strong dollar pressured the euro, compounded by a surprising decline in the German November ZEW survey, which assesses economic growth expectations. This survey reported a drop of -3.7 to 7.4, falling short of predictions that anticipated a rise to 13.2.
Dovish statements from ECB Governing Council member Rehn added to the euro’s struggles. He alluded to a likely interest rate cut from the ECB in December, citing the ongoing disinflation trend. Such sentiments were further exacerbated by political instability in Germany, as Chancellor Scholz’s Social Democrats and opposition parties agreed on an early election scheduled for February 23.
Shifts in Global Markets and Commodity Prices
Swaps currently indicate a near certainty—100%—that the ECB will cut rates by -25 basis points at their December 12 meeting, with a 23% likelihood of a more aggressive -50 basis point cut.
The USD/JPY (^USDJPY) rose by +0.62% on Tuesday, as the yen fell to a 3-1/2 month low against the dollar. This dip can be attributed to higher Treasury yields. Market speculation around Trump’s tariff policies has also weighed down the yen, despite positive signals from Japan’s October machine tool orders, which displayed a significant +9.3% year-over-year increase—the largest rise in four months.
Mixed Results for Precious Metals
In commodity trading, December gold (GCZ24) fell by -11.40 (-0.44%), while December silver (SIZ24) rose by +0.146 (+0.48%). Overall, precious metals closed mixed, with gold hitting a 1-3/4 month low. The dollar’s rally to a 4-1/4 month peak, along with rising global bond yields, has pressured metal prices. Nevertheless, silver’s gains were supported by the robust rise in Japanese machine tool orders, fostering increased demand for industrial metals.
On a more positive note for precious metals, Rehn’s dovish comments from the ECB bolstered gold as a safe-haven asset, affirming the likelihood of forthcoming rate cuts. Anticipated Republican control over the House and Senate may further fuel inflation worries, bolstering gold demand as investors seek protection from economic volatility. Additionally, persistent tensions in the Middle East have amplified the appeal of precious metals as a safe-haven investment.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
