Dollar Index Hits Two-Year High as Economic Signals Shine
The dollar index (DXY00) saw an increase of +0.36% on Thursday, reaching a two-year high. After beginning the day lower, the dollar rebounded on the back of positive economic news from the U.S. Additionally, Wednesday’s FOMC announcement indicated only a 50 basis point cut in interest rates for next year, down from a prior projection of 100 basis points. However, strength in the stock market has lessened some demand for dollar liquidity.
Labor Market Shows Improvement
Initial weekly unemployment claims in the U.S. dropped by -22,000 to a total of 220,000. This figure exceeded expectations, which anticipated claims would rise to 230,000, suggesting a stronger labor market.
GDP Surprises on the Upside
The U.S. Q3 GDP was unexpectedly revised up to 3.1% (quarter-on-quarter annualized), surpassing the expectation of a constant figure at 2.8%.
Business Sentiment Weakens
In contrast, the December Philadelphia Fed business outlook survey fell unexpectedly by -10.9 to a 20-month low of -16.4, diverging from expectations, which had predicted a rise to 2.8.
Leading Indicators and Home Sales Rise
Leading indicators for November rose by +0.3% month-over-month, which was stronger than the expected decline of -0.1%. This marks the largest monthly increase in nearly three years. Additionally, existing home sales for November increased by +4.8% month-over-month to an eight-month high of 4.15 million, exceeding expectations of a +3.2% rise to 4.09 million. Currently, the market is anticipating a 9% chance of a -25 basis point rate cut during the FOMC meeting scheduled for January 28-29.
Eurozone Dynamics
EUR/USD (^EURUSD) increased by +0.14% on Thursday. The euro experienced slight gains as the German January GfK consumer confidence index rose more than expected. However, strength in the dollar limited these gains, despite rising European government bond yields supporting the euro’s interest rate differential. In the Eurozone, new car registrations fell by -1.9% to 869,816 units in November.
The German January GfK consumer confidence index improved by +1.8 to -21.3, outpacing expectations of -22.5. Swaps are indicating a 100% likelihood of a -25 basis point cut by the ECB in its next meeting on January 30, with a 12% chance of a -50 basis point cut.
The Yen Takes a Hit
USD/JPY (^USDJPY) rose by +1.69%, with the yen falling to a 4-3/4 month low against the dollar. This decline followed the BOJ’s decision to keep interest rates unchanged and comments from BOJ Governor Ueda reaffirming that there’s no urgency to raise rates. The BOJ maintained its overnight call rate at 0.25%.
Ueda mentioned, “The overall picture on wages should be clearer by March or April, and it may take time to assess the full impact of the Trump administration’s policies.”
Precious Metals Face Pressure
February gold (GCG25) closed down -45.20 (-1.70%), while March silver (SIH25) fell -1.329 (-4.32%). Precious metals experienced a sharp sell-off, with gold hitting a one-month low and silver falling to a 3-1/4 month low. This decline can be attributed to Wednesday’s FOMC signal of fewer interest rate cuts next year, alongside the rally in the dollar index and rising global bond yields.
Despite the downturn, geopolitical risks still provide safe-haven support for precious metals due to unrest in various regions. Silver prices were buoyed slightly by the upward revision of Q3 GDP and a significant rise in existing home sales, which bodes well for industrial metals demand.
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
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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.
