Dollar Strengthens Amid Fed Comments and Global Economic Shifts
Dollar Index Gains with Rising Yields and Weak Stocks
The dollar index (DXY00) rose by +0.47% on Wednesday. Higher T-note yields and weakness in the stock market supported moderate gains for the dollar. Additionally, the euro’s decline against the dollar was influenced by dovish remarks from ECB Vice President Guindos, who anticipates that the ECB will keep reducing interest rates. Fed Governor Bowman’s hawkish comments also boosted the dollar as she suggested a cautious approach to further rate cuts, citing slowed progress in reducing inflation.
Dollar Hits One-Year High Amid Fiscal Concerns
Over the past two weeks, the dollar has surged to a one-year high, a trend driven by President-elect Trump’s plans to raise tariffs. Concerns that his fiscal policies could lead to increased inflation and discourage the Fed from cutting interest rates have also played a role.
Fed Officials Comment on Interest Rates
Governor Bowman stated, “I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the endpoint while recognizing that we have not yet achieved our inflation goal and closely watching the evolution of the labor market.” Meanwhile, Governor Cook mentioned, “It likely will be appropriate to move the policy rate toward a more neutral stance over time,” while emphasizing that the “magnitude and timing” of any reductions will depend on incoming data and economic outlook. Current market expectations suggest a 52% chance of a -25 bp rate cut at the upcoming December 17-18 FOMC meeting.
Euro Weakens Against the Dollar
The EUR/USD (^EURUSD) currency pair dropped by -0.55% on Wednesday. The euro’s retreat was largely attributed to the dollar’s strength, alongside dovish signals from ECB Vice President Guindos regarding interest rate cuts. On a brighter note, signs of wage growth in the Eurozone support a stronger euro; the ECB reported a +5.4% year-over-year increase in negotiated pay for Q3, the largest rise since the euro’s introduction in 1999.
Market Expectations for ECB Rate Cuts
Market swaps indicate a 100% probability of a -25 bp rate cut by the ECB during its December 12 meeting, with a 19% chance of a -50 bp cut. Guindos conveyed, “My impression is that the ECB will continue reducing the restriction of its monetary-policy stance over the next months and quarters.”
Japanese Yen Under Pressure
The USD/JPY (^USDJPY) increased by +0.48% on Wednesday as the yen faced pressure from rising T-note yields. The yen’s decline was moderated by a reported willingness from Russian President Putin to discuss a cease-fire with US President-elect Trump regarding Ukraine. Positive news from Japan included an upward revision of October machine tool orders by +0.1% to 9.4% year-over-year, as well as stronger-than-expected Japanese trade data, with October exports rising +3.1% year-over-year, surpassing the +1.0% expectation.
Mixed Performance in Precious Metals
December gold (GCZ24) closed up +20.70 (+0.79%), whereas December silver (SIZ24) fell by -0.257 (-0.32%). Precious metals had a mixed day on Wednesday, with gold reaching a one-week high as demand surged due to ECB statements and rising UK consumer prices. However, a stronger dollar and higher global bond yields negatively impacted precious metals, while easing tensions in Ukraine-Russia reduced safe-haven demand temporarily.
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.
