Dollar Strengthens Amid Economic News and Tariff Speculation
Market Reactions to Employment Data and Interest Rate Expectations
The dollar index (DXY00) has risen by +0.52%. This gain comes after CNN reported that President-elect Trump may declare a national emergency to advance his tariff plans, potentially disrupting global trade and increasing price pressures. The dollar increased further as the yield on the 10-year T-note surged to an 8-1/2 month high, enhancing the dollar’s appeal due to favorable interest rate differentials.
Job Market Updates Provide Mixed Signals
Today’s U.S. labor market news presented a mixed bag for the dollar. The Dec ADP employment change increased by +122,000, which was below the expectations of +140,000. Conversely, weekly jobless claims unexpectedly dropped by -10,000 to a 10-1/2 month low of 201,000, suggesting a stronger job market than the anticipated increase to 215,000.
Fed Governor Waller’s dovish comments, indicating that more interest rate cuts may be appropriate, limited the dollar’s gains. He stated, “The extent of further easing will depend on what the data tell us about progress toward 2% inflation, but my bottom-line message is that I believe more cuts will be appropriate.”
The markets currently see only a 5% chance of a -25 basis point rate cut at the FOMC meeting scheduled for January 28-29.
Euro Faces Pressure Amid Weak Economic Data
EUR/USD (^EURUSD) fell by -0.35% as the dollar’s strength weighed heavily on the euro. A report showing that Eurozone economic confidence dropped to a 15-month low added to the euro’s challenges. Additionally, disappointing economic figures from Germany, the largest economy in Europe, exacerbated this situation, as German factory orders and retail sales for November fell more than anticipated.
Specifically, Eurozone economic confidence decreased -1.9, landing at a 15-month low of 93.7, below the expected 95.6. The Eurozone’s Nov PPI rose by +1.6% month-over-month but fell -1.2% year-over-year, exceeding expectations of +1.5% and -1.4%, respectively. In Germany, factory orders declined by -5.4% month-over-month, much worse than the projected -0.2%, while retail sales dropped unexpectedly by -0.6% against an expected increase of +0.5%.
Swaps now reflect a 98% probability of a -25 basis point rate cut from the ECB at its next meeting, set for January 30.
Yen Weakens as Economic Signals Deteriorate
The USD/JPY (^USDJPY) rose by +0.18%, with the yen hitting a 5-1/2 month low against the dollar. Factors behind this trend include rising T-note yields and a strengthening dollar. Japanese economic reports contributed to the yen’s decline, revealing that December consumer confidence unexpectedly fell and that the BOJ’s quarterly report indicated supply in Japan’s economy has exceeded demand for 18 consecutive quarters, pointing to weak inflationary pressures.
In detail, the Japan Dec consumer confidence index slipped by -0.2 to 36.2, lower than the expected increase to 36.6. Additionally, Japan’s Q3 output gap was revised upward to -0.53% from -0.58%.
Precious Metals Experience Modest Gains
February gold (GCG25) is up +14.80 (+0.56%), while March silver (SIH25) has increased by +0.204 (+0.66%). Current gains in precious metals reflect a mild surge in safe-haven demand amid concerns that President-elect Trump’s tariff policies could spark a global trade war. Reports indicate that Mr. Trump is contemplating a national economic emergency to expedite these tariff plans. Similarly, dovish comments from Fed Governor Waller have bolstered gold’s appeal as a safe asset.
Furthermore, gold demand has seen support from China’s recent actions, with the PBOC increasing its gold reserves for the second consecutive month, raising holdings from 72.96 million troy ounces in November to 73.29 million in December. Ongoing geopolitical tensions, including the situation in Syria and the Ukraine-Russia conflict, have also contributed to gold’s safe-haven status.
However, the strength of the dollar is capping precious metal gains, while rising global bond yields present a bearish outlook for these assets. The disappointing German factory orders have added pressure on silver prices, as they indicate weaker demand for industrial 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 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.
