Dollar Index Hits 2-1/2 Week High Amid Strong Import Prices
Friday’s dollar performance boosted by unexpected import price rise and higher yields.
The dollar index (DXY00) rose by +0.03% to reach a 2-1/2 week high on Friday. This increase was bolstered by an unexpected rise in the U.S. November import price index ex-petroleum, which is a hawkish indicator for Federal Reserve policy. Additionally, a surge in the 10-year T-note yield also contributed to the dollar’s strength.
On the other hand, stronger stock performance led to reduced demand for the dollar. Furthermore, market expectations have begun to shift, as many anticipate a -25 basis point interest rate cut from the Fed at the upcoming FOMC meeting next week.
The U.S. November import price index ex-petroleum unexpectedly rose by +0.2% month-over-month, surpassing expectations which indicated no change. Currently, the markets are pricing in a 97% probability of a -25 basis point rate cut at the December 17-18 FOMC meeting.
In currency exchanges, EUR/USD (^EURUSD) increased by +0.25%. This rebound was fueled by short covering in the euro after the 10-year German bund yield also rose to a 2-1/2 week high. Initially, the euro faced downward pressure following dovish comments from European Central Bank (ECB) Governing Council member, Villeroy de Galhau, who predicted “more rate cuts next year.” Furthermore, the Bundesbank’s decision to lower its 2024 German GDP estimate and inflation forecasts, along with disappointing German October export figures, negatively affected the euro.
In Europe, October industrial production remained unchanged, aligning with expectations, although the September figure was revised upwards from -2.0% to -1.5% month-over-month. German October export data was less favorable, falling -2.8% month-over-month, which was worse than the anticipated -2.6% decline and marked the most significant drop in ten months.
The Bundesbank revised its 2024 German GDP forecast downward from +0.3% to -0.2% and reduced its inflation estimate from +2.8% to +2.5%. As noted, Villeroy de Galhau expressed confidence in financial markets’ predictions, anticipating over 100 basis points of future easing. Interest rate swaps are now pricing in a 100% chance of a -25 basis point cut from the ECB at its next meeting on January 30, along with a 53% likelihood for a more substantial -50 basis point cut.
Turning to the U.S. dollar and Japanese yen, USD/JPY (^USDJPY) rose by +0.71%. This increase occurred as the yen fell to a 2-1/2 week low against the dollar, continuing its decline throughout the week. Recent reports indicated that the Bank of Japan (BOJ) sees no urgency in further rate hikes, which contributed to downward pressure on the yen. Additionally, rising T-note yields further weakened the yen’s position. A mixed bag of economic data emerged from Japan: the Q4 Tankan large manufacturing business conditions index rose unexpectedly from 13 to 14, while October industrial production was revised down from +3.0% to +2.8% month-over-month.
In commodity markets, February gold (GCG25) closed down -33.60 (-1.24%) and March silver (SIH25) fell -0.591 (-1.87%) on Friday. Precious metals continued to face pressure from Thursday’s declines, with silver prices hitting a 1-1/2 week low. The dollar’s strength, hitting a 2-1/2 week peak, alongside rising global bond yields, adversely affected metals prices. The unexpected rise in the U.S. November import price index ex-petroleum indicated persistent price pressures, reflecting a hawkish Fed stance. Silver prices were particularly influenced by the Bundesbank’s lower GDP projection and disappointing German export performance, signaling potential challenges for industrial metals demand.
However, Villeroy de Galhau’s dovish outlook contributed to a boost in gold demand as a safe haven, suggesting “more rate cuts next year.” Additionally, ongoing geopolitical tensions, such as the recent unrest in Syria and the escalating conflict between Ukraine and Russia, have heightened the appeal of 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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
