Dollar Gains Strength Amid Political Turmoil and Economic Indicators
Rise in Consumer Sentiment Boosts Dollar Index
The dollar index (DXY00) increased by +0.49% on Friday. It saw a rise largely due to political uncertainty in Germany, as German Chancellor Scholz announced a snap election for January. Additionally, the dollar strengthened after the University of Michigan’s November consumer sentiment index climbed more than expected to a 7-month high. However, lower Treasury note yields and stronger stock performance limited dollar gains.
Consumer Sentiment Index Surpasses Expectations
The University of Michigan’s US November consumer sentiment index jumped by +2.5 to a 7-month high of 73.0, exceeding forecasts of 71.0.
Mixed Signals from Inflation Expectations Report
The report on November inflation expectations produced mixed results. The 1-year inflation expectations dropped to 2.6%, a 3-3/4 year low, from 2.7% in October, against expectations of maintaining the previous rate. Meanwhile, the 5-10 year inflation expectations increased to 3.1%, up from 3.0% in October.
Market Anticipates Rate Cuts
Currently, markets assign a 65% probability for a -25 basis point rate cut during the FOMC meeting scheduled for December 17-18.
Euros Slide as Political Unrest Continues
On Friday, EUR/USD (^EURUSD) fell by -0.84%. The dollar’s strength negatively affected the euro. Political instability was also a factor, as tensions rose in Germany following Chancellor Scholz’s dismissal of Free Democratic Party Finance Minister Linder, resulting in a minority government situation.
ECB Rate Cut Expectations Grow
Market swaps indicate a 100% chance of a -25 basis point rate cut by the European Central Bank at its December 12 meeting, with a 17% chance of a -50 basis point cut.
Yen Shows Small Gains with Positive Economic Data
USD/JPY (^USDJPY) dipped by -0.14%. The yen strengthened slightly due to some encouraging economic data from Japan. Household spending for September fell less than anticipated, and the leading index CI rose to a 4-month high.
Japanese Economic Indicators Show Improvement
The Japan September leading index CI increased by +2.5 to 109.4, outperforming expectations of 109.0. Additionally, household spending decreased by -1.1% year-over-year, which was better than the anticipated -1.8% decline.
Precious Metals Decline with Stronger Dollar
December gold (GCZ24) closed down -11.00 (-0.41%), and December silver (SIZ24) dropped -0.406 (-1.27%). Both metals faced downward pressure due to a strengthening dollar. The S&P 500’s record high also reduced the demand for safe-haven assets like gold and silver. Remarks from Fed Chair Powell about persistent core inflation raised concerns regarding the pace of interest rate cuts, further impacting gold prices. Speculation around President-elect Trump’s proposed high tariffs could negatively affect demand for industrial metals, contributing to lower silver prices.
Inflation Hedge Demand May Persist
Looking ahead, strong demand for gold as an inflation hedge may continue, especially if Republicans regain control of Congress. This shift could simplify the implementation of policies aimed at lowering taxes and increasing tariffs, potentially reviving inflation. Additionally, ongoing global conflicts in the Middle East are likely to maintain safe-haven interest in precious metals.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) any positions in the securities mentioned in this article. All information and data are provided solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
