Dollar Weakness Amid Euro Gains and Market Shifts
The dollar index (DXY00) dropped by -0.42% on Monday, primarily influenced by the strength of the euro. The EUR/USD rose following hawkish comments from ECB Governing Council member Nagel, who suggested that central banks might have to increase interest rates if international tensions escalate, leading to higher inflation. This decline continued as Treasury note yields reversed an early increase, putting additional pressure on the dollar’s interest rate advantage.
Market Insights on US Housing Index
Despite the dollar’s downturn, Monday brought unexpected news: the US November NAHB housing market index jumped +3, reaching a 7-month high of 46, surpassing forecasts of a decrease to 42. This increase provided some support for the greenback. Meanwhile, a weakening Japanese yen contributed positively to the dollar’s position.
European Factors Influencing Currency Movements
EUR/USD (^EURUSD) increased by +0.51% on Monday. Gains in the euro were driven by Nagel’s cautionary remarks about possible interest rate hikes in response to rising trade tensions, which could impact inflation. The divergence in US and German bond yields also provided a tailwind for the euro, as Treasury note yields fell while German bund yields rose.
In light of these dynamics, Nagel cautioned that heightened international tensions could lead to increased inflationary pressures and more volatility. Similarly, ECB Governing Council member Stournaras warned of potential economic weakness and a possible recession in the Eurozone should the US impose further tariffs.
Expectations for ECB’s Rate Moves
Market expectations suggest a 100% chance of a -25 bp rate cut by the ECB during the December 12 meeting, with a 17% likelihood of a -50 bp cut. In contrast, USD/JPY (^USDJPY) rose by +0.20% on Monday as the yen weakened. This decline followed news that Japan’s September core machine orders unexpectedly fell by -0.7% month-over-month, falling short of the +1.5% increase anticipated by analysts.
Bank of Japan Governor Ueda refrained from signaling any imminent interest rate hike during the December 18-19 meeting, stating, “The actual timing of the adjustments of interest rates will continue to depend on developments in economic activity and prices as well as financial conditions going forward.”
Precious Metals Rally Amid Market Conditions
Gold for December delivery (GCZ24) finished +44.50 (+1.73%) higher, while December silver (SIZ24) rose by +0.792 (+2.60%). The rally in precious metals was largely driven by a weaker dollar and strong demand for gold. With the Republicans controlling both the House and Senate, there exist opportunities for policies that could increase inflation through lower taxes and higher tariffs. Moreover, Goldman Sachs suggested that investors should “go for gold,” predicting prices might reach $3,000 an ounce by year-end 2024.
Geopolitical developments are further fueling safe-haven interest in precious metals. Ongoing conflicts in the Middle East coupled with reports that North Korea may send as many as 100,000 troops to support Russia’s actions have heightened risks. Silver’s gains were bolstered by the unexpectedly robust NAHB housing market index.
Stock Market Dynamics and Precious Metals
Interestingly, strength in stock markets on Monday tempered some demand for precious metals. Additionally, Nagel’s remarks on potential rate increases created a more cautious atmosphere for these assets.
On the date of publication, Rich Asplund did not hold (either directly or indirectly) any positions in 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 those of the author and do not necessarily reflect those of Nasdaq, Inc.
