Dollar Strengthens Following Recent Economic Developments
The dollar index (DXY00) increased by +0.20% on Tuesday, building on Monday’s rise of +0.39% after a previous drop of -0.73% last Friday.
Support from Interest Rates and Government Action
This week’s dollar rebound is credited to better US interest rate differentials, with the 10-year T-note yield edging up by +0.2 basis points on Tuesday, alongside Monday’s increase of +6 basis points.
Earlier, the dollar had dropped sharply by -0.88% last Friday after a disappointing US PCE price index report, which hinted at a dovish Federal Open Market Committee (FOMC) policy. However, the current positive trend has been fueled by rising T-note yields and the passing of a stop-gap funding bill in Congress that prevented a government shutdown—a scenario that would have negatively affected the US economy.
Mixed Signals from Economic Indicators
In terms of economic indicators, the Philadelphia Fed’s December non-manufacturing activity index declined by -0.1 points to -6.0 from -5.9 in November, falling short of forecasts that predicted a rise to -2.4.
Currently, markets are pricing in a 9% probability for a -25 basis points rate cut during the upcoming FOMC meeting scheduled for January 28-29.
Euro and Yen Trends Amid ECB and BOJ Policies
The EUR/USD (^EURUSD) pair slipped by -0.14%, primarily due to the stronger dollar. The euro received some support from comments made by European Central Bank (ECB) President Christine Lagarde, who mentioned that ECB members are attentive to ongoing price pressures in the services sector while expressing confidence that Consumer Price Index (CPI) measures are nearing target levels.
Market swaps indicate a fully priced-in -25 basis points rate cut by the ECB at its next meeting on January 30, with an 8% chance of a more substantial -50 basis points cut emerging at that time.
Meanwhile, the USD/JPY (^USDJPY) pair rose by +0.09%, currently consolidating below last Friday’s five-month high. The yen has struggled recently as government officials have downplayed expectations for a near-term Bank of Japan (BOJ) rate hike. The BOJ opted to keep its overnight call rate steady at 0.25% during its last meeting.
However, support for the yen emerged after Finance Minister Kato expressed concerns about recent currency fluctuations influenced by speculators.
Precious Metals Show Resilience Amid Global Tensions
In commodities, February gold (GCG25) rose by +$7.30 (+0.28%), while March silver (SIH25) increased by +$0.094 (+0.31%). Gold prices managed to climb despite the strengthening dollar and slightly higher T-note yields. The precious metals market has received support from safe-haven buying due to geopolitical risks, following the collapse of the Syrian government and rising tensions in the Ukraine-Russia conflict. Silver prices were bolstered by news that China plans to implement additional stimulus measures in 2025.
On the date of publication, Rich Asplund did not hold any positions in the securities mentioned herein. All information in this article is for informational purposes only. Please review the Barchart Disclosure Policy here.
The views expressed in this article are those of the author and do not necessarily reflect the opinions of Nasdaq, Inc.
