Dollar Declines as Fed Signals More Rate Cuts Ahead
The dollar index (DXY00) experienced a slight decrease of -0.06% on Tuesday. This drop was influenced by lower T-note yields, which diminished the dollar’s appeal. Furthermore, a disappointing report from the US Oct Empire manufacturing survey revealed a sharp decline in general business conditions, contributing to the dollar’s weakness. However, the dollar managed to recover somewhat after Tuesday’s dip in equity markets increased demand for liquidity.
The US Oct Empire manufacturing survey showed a significant drop of -23.6, falling to a 5-month low of -11.9, which was much worse than the anticipated figure of 3.6.
San Francisco Fed President Daly referred to last month’s Fed rate cut as a necessary “recalibration” due to easing inflation, emphasizing that interest rates remain restrictive. She indicated that the Fed could implement one or two more 25 basis point rate cuts this year.
Currently, markets are pricing in a 97% likelihood of a -25 basis point cut at the FOMC meeting set for November 6-7, while the chances for a -50 basis point cut are at 0% for that same meeting.
In the foreign exchange market, the EUR/USD (^EURUSD) fell by -0.18%, reaching a low not seen in 2-1/4 months. The euro faced downward pressure from expectations that the European Central Bank (ECB) will announce a 25 basis point rate cut during its policy meeting this Thursday. It did recover some losses later, aided by a report showing that Eurozone industrial production in August rose by 1.8% month-on-month, marking the largest increase in 1-1/2 years, alongside better-than-expected projections from the German ZEW survey on economic growth.
The Eurozone’s August industrial production growth met expectations, rising by 1.8% month-on-month — the most significant increase in 1-1/2 years.
The German October ZEW survey showed expectations of economic growth improved by +9.5, reaching 13.1, which surpassed expectations of 10.0.
Swaps are currently indicating a 97% chance of a -25 basis point rate cut by the ECB at its October 17 meeting, and a 100% chance for the same cut at the meeting on December 12.
The USD/JPY (^USDJPY) declined by -0.38% on Tuesday as the yen gained strength. The boost in the yen was attributed to a rise in the 10-year Japanese government bond yield to a 2-1/4 month high of 0.978%. The yen’s gains were further supported by the fall in T-note yields.
Market swaps show a 2% probability for a +10 basis point rate hike by the Bank of Japan (BOJ) at the upcoming meeting on October 30-31, while the likelihood increases to 25% for a similar increase during the December 18-19 meeting.
In commodities, December gold (GCZ24) closed higher by +13.30 (+0.50%), and December silver (SIZ24) rose +0.440 (+1.41%). This increase in precious metals prices, reaching a one-week high, was driven by a weaker dollar and a dip in equity markets, which amplified safe-haven demand. Additionally, the decline in T-note yields and ongoing tensions in the Middle East bolstered interest in gold as a reliable store of value. The prospect of a rate cut by the ECB on Thursday also enhanced demand for gold and silver.
Despite silver’s rise, its gains were somewhat capped due to negative momentum from falling copper prices, which recently hit a three-week low. The disappointing US Oct Empire manufacturing survey results served as another negative signal for industrial metals demand.
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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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