Dollar Rises to Two-Year High as Fed Signals Fewer Rate Cuts
The dollar index (DXY00) surged by +1.04% on Wednesday, reaching its highest level in two years. This increase came as the Federal Open Market Committee (FOMC) reduced its forecast for interest rate cuts next year to 50 basis points, down from an earlier projection of 100 basis points. Additionally, the FOMC raised its estimates for US GDP and core PCE price inflation while lowering its unemployment rate forecast. Fed Chair Jerome Powell’s comments about the need for a restrictive monetary policy further bolstered the dollar’s strength. However, mixed housing data and a record current account deficit posed challenges.
Housing Data Mixed but Future Permits Shine
In November, US housing starts unexpectedly declined by -1.8% month-over-month to 1.289 million, which fell short of the anticipated increase to 1.345 million. On a brighter note, building permits for November, which indicate future construction, rose by +6.1% month-over-month to a nine-month high of 1.505 million, exceeding expectations of 1.430 million.
Current Account Deficit Reaches Record Levels
The US recorded its largest current account deficit ever in Q3, reaching -$310.9 billion, surpassing the forecasted -$287.1 billion. Following the announcement, the FOMC confirmed a reduction in the fed funds target range by -25 basis points to 4.24%-4.50%, noting that risks to labor and inflation goals are about balanced.
Fed Projects Future Rates and Economic Outlook
The FOMC’s dot plot now indicates that the median fed funds rate is expected to reach 3.875% by the end of 2025, up from September’s estimate of 3.375%. This suggests only a couple of 25 basis point cuts next year. The committee also upgraded its 2024 GDP estimate to 2.5% from 2.0% and adjusted the 2025 forecast to 2.1% from 2.0%. Additionally, the unemployment rate forecast for 2024 was lowered to 4.2% from 4.4%.
Chair Powell emphasized that more work is needed to address inflation, reinforcing the need for a restrictive monetary policy to achieve the inflation target.
Market Reactions: Euro and Yen Impacted
On the currency front, the Euro fell against the dollar, with EUR/USD (^EURUSD) down by -1.20% to a half-week low. The surge of the dollar weighed on the euro despite mixed Eurozone economic reports. The November Eurozone Consumer Price Index (CPI) was revised lower to +2.2% year-over-year from +2.3%, while core CPI held steady at +2.7% year-over-year. Construction output for October showed a significant increase of +1.0% month-over-month, the highest rise in 21 months.
Meanwhile, the dollar also strengthened against the yen, with USD/JPY (^USDJPY) climbing by +0.74%. The yen hit a three-week low as rising Treasury note yields and less anticipated monetary easing next year pressured it. Japanese trade data showed November exports rising by +3.8% year-over-year, but imports unexpectedly fell by -3.8% year-over-year.
Precious Metals Take a Hit
February gold prices (GCG25) fell by -$8.70 (-0.33%), while March silver (SIH25) dropped by -$0.191 (-0.59%) as both metals saw losses due to the stronger dollar and rising global bond yields. Gold prices declined over -$35 per ounce during post-market trading following the FOMC’s outlook indicating fewer rate cuts next year. Despite this, geopolitical risks surrounding the collapse of the Syrian government and the ongoing Ukraine-Russia tensions provided some safe-haven support for precious metals.
On the flip side, increased industrial demand supported silver prices, following news that US building permits reached a nine-month high, coupled with Eurozone construction output presenting its biggest gain in nearly two years.
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.
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