Dollar Index Soars to New High Amid Inflation Speculation
The dollar index (DXY00) rose by +0.41% on Wednesday, achieving a 1-year high. The currency recovered from early losses and strengthened, buoyed by a rally following recent elections. Market speculation suggests that Treasury note yields could rise due to inflation concerns linked to President-elect Trump’s pro-tariff policies.
Inflation Data Supports Dollar Movement
Initially, the dollar dipped as Treasury note yields decreased, influenced by the as-expected US October Consumer Price Index (CPI) report. The report indicated a +0.3% increase month-over-month and a +2.6% rise year-over-year, aligning with expectations. Notably, the core CPI, excluding food and energy, remained unchanged from September at +3.3% year-over-year.
Federal Reserve’s Stance on Rates
Minneapolis Fed President Neel Kashkari commented that inflation trends are promising, expressing confidence that it won’t stay above the Fed’s 2% target. In contrast, Dallas Fed President Lorie Logan stated that the Federal Open Market Committee (FOMC) may require more rate cuts but must act cautiously, considering the current monetary policy’s restrictiveness. St. Louis Fed President James Musalem emphasized that monetary policy is well-positioned to bring inflation back to target while supporting full employment, provided inflation continues to decrease.
Euro and Yen: Market Reactions
The euro (EUR/USD) weakened by -0.56% on Wednesday, reaching a 1-year low, primarily due to dollar strength. Comments from European Central Bank (ECB) Governing Council member Jens Nagel suggested President-elect Trump’s tariff strategies could negatively impact Germany’s economy, further pressuring the euro. Initially, the euro saw temporary gains following the benign US CPI report and Nagel’s acknowledgment of ongoing inflationary pressures, particularly in services.
In addition, swaps are pricing in a 100% chance of a -25 basis point rate cut by the ECB at their December 12 meeting, with a 23% chance of a -50 basis point cut.
Japanese Yen Experiences Decline
The yen (USD/JPY) rose by +0.61% but ultimately fell to a 3.5-month low against the dollar. This decline was driven by speculation that President-elect Trump’s policies could increase inflation, affecting the Fed’s interest rates. The yen initially gained due to a stronger-than-expected Japan October Producer Price Index (PPI), which increased by +0.2% month-over-month and +3.4% year-over-year, exceeding expectations. The +3.4% year-over-year rise is the largest seen in 14 months.
Precious Metals Retreat from Early Gains
December gold (GCZ24) closed down -19.80 (-0.76%), while December silver (SIZ24) dropped -0.096 (-0.31%). Precious metals reversed early advances and fell, with gold hitting a 1.75-month low. The rebound of the dollar and statements from ECB officials contributed to this decline. Moreover, the strength of Japan’s PPI may prompt the Bank of Japan (BOJ) to consider interest rate increases in the coming month.
Despite a temporary rise supported by a benign US CPI report, demand for gold as an inflation hedge remains high. Factors such as potential Republican control in Congress could ease the Trump administration’s push for lower taxes and higher tariffs, potentially reviving inflation. Ongoing unrest in the Middle East also continues to stimulate safe-haven demand for precious metals.
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 is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
