Dollar Strengthens Amid Positive Economic Indicators
Fed’s Comments Impact Interest Rate Expectations
The dollar index (DXY00) rose by +0.43% on Thursday, reaching a new 1-year high. This surge in the dollar was largely influenced by encouraging US economic news, reducing the likelihood of aggressive interest rate cuts from the Federal Reserve. Weekly jobless claims fell to a 5-1/2 month low, while the Producer Price Index (PPI) for October increased more than anticipated, signaling a hawkish stance for future Fed policy. The dollar’s gains strengthened further after Fed Chair Powell remarked that there is no urgency for the Fed to reduce interest rates.
Initial unemployment claims in the US decreased by -4,000 to 217,000, marking the lowest level in over five months, and surpassing expectations of 220,000.
PPI Surges Beyond Forecasts
For October, the PPI for final demand rose +2.4% year-over-year, exceeding expectations of +2.3% year-over-year. Additionally, the PPI excluding food and energy increased +3.1% year-over-year, higher than the expected +3.0% year-over-year. Fed Chair Powell characterized the recent economic performance as “remarkably good,” reinforcing the idea that there is no need to hasten interest rate cuts.
Currently, markets are pricing in a 60% chance of a -25 basis point rate cut at the upcoming FOMC meeting on December 17-18.
Euro Weakened by Dismal Eurozone Data
The EUR/USD (^EURUSD) pair fell to a 13-month low, declining -0.38% on Thursday. This downturn followed October’s industrial production report from the Eurozone, which displayed the largest decrease in eight months. Remarks from ECB Vice President Guindos added to pressure on the euro, as he noted that the Eurozone’s economic recovery was not meeting expectations. Dovish minutes from the recent ECB meeting further weighed on the euro.
In September, Eurozone industrial production fell by -2.0% month-over-month, compared to an anticipated decline of -1.4% month-over-month, marking the most significant drop in eight months.
ECB Adopts a Cautious Outlook
According to Vice President Guindos, the anticipated economic “recovery” in the Eurozone is occurring with less intensity than expected. The minutes from the Oct 16-17 ECB meeting reflected concerns over inflation, with officials expressing growing confidence in a continuing disinflation process aimed at meeting medium-term targets.
Swaps now imply a 100% chance of a -25 basis point rate cut by the ECB at its December 12 meeting, with a 27% likelihood of a -50 basis point cut.
Yen Weakens as Political Climate Raises Inflation Concerns
The USD/JPY (^USDJPY) pair rose by +0.53%, with the yen hitting a new 3-1/2 month low against the dollar. This decline was fueled by worries that a Republican sweep in the upcoming elections could lead to policies under President-elect Trump that might raise inflation, making it less likely for the Fed to cut interest rates significantly.
Precious Metals Decline Due to Strong Dollar
December gold (GCZ24) closed down -$13.60 (-0.53%), while December silver (SIZ24) fell -$0.094 (-0.31%). Both precious metals reached two-month lows amid a strong dollar rally to a one-year high. The decrease in gold and silver prices was driven by positive US economic reports that raised expectations for Fed policy and weakened demand for industrial metals following Eurozone production data.
Despite the recent losses, demand for gold as a hedge against inflation may remain robust. With Republicans controlling both the House and Senate, there’s potential for the Trump administration to implement tax cuts and deregulation policies, possibly reigniting inflation. Additionally, ongoing conflicts in the Middle East continue to sustain safe-haven interest in precious 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.
