Dollar Strengthens Amid Economic Reports; Euro and Yen Struggle
The dollar index (DXY00) experienced a rise of +0.30% on Tuesday. Initially, the dollar faced losses but then made a recovery, showing moderate gains. This change came as Treasury yields increased following stronger-than-expected reports on US job openings for November and the ISM services index for December. These reports suggest a hawkish tilt for Federal Reserve policy, indicating fewer chances for rate cuts soon. Richmond Fed President Barkin’s comments also supported the dollar, emphasizing that persistent price pressures may require tougher interest rates. Additionally, weakness in the stock market led to increased liquidity demand for the dollar.
Trade Deficit and Job Growth Impact Dollar
Early in the day, the dollar declined due to negative news from Monday. Reports indicated that aides to President-elect Trump were considering a tariff program focused only on critical imports. If such a plan were enacted, it could limit global trade disruptions and lessen the inflationary impact of tariffs, which would be dovish for Fed policy. Furthermore, the US trade deficit widened in November, posing a negative outlook for Q4 GDP and contributing bearish sentiment for the dollar.
The US trade deficit for November increased to -$78.2 billion from -$73.6 billion in October, although it was smaller than the anticipated -$78.3 billion.
Job openings as reported in the US JOLTS for November increased unexpectedly by +259,000, reaching a six-month high of 8.098 million, surpassing expectations of a decline to 7.740 million.
The ISM services index for December rose by +2.0 to 54.1, which was also above the expected 53.5.
Richmond Fed President Barkin reiterated the Fed’s commitment to maintaining a 2% inflation target, cautioning that continued price pressures may lead to stricter interest rate policies.
Currently, markets anticipate a mere 5% likelihood for a -25 basis point rate cut at the upcoming January 28-29 FOMC meeting.
Euro Struggles as Dollar Gains Momentum
On Tuesday, EUR/USD (^EURUSD) saw a decline of -0.38%. The euro lost its overnight gains as the dollar strengthened due to positive US economic news. Initially, the euro rallied in response to the Eurozone’s slightly hawkish inflation data, with December CPI rising as anticipated and the European Central Bank’s (ECB) inflation expectations for November increasing.
In the Eurozone, December CPI rose by +2.4% year-on-year, up from +2.2% in November, aligning with expectations. Core CPI for December remained steady at +2.7% year-on-year, unchanged from November.
The ECB’s November inflation expectations saw a rise in the one-year rate to 2.6% from 2.5% in October, while the three-year rate increased to 2.4% from 2.1%.
Swaps currently reflect a 98% probability of a -25 basis point rate cut by the ECB at its January 30 meeting.
Yen Shrinks to 5.5-Month Low
Meanwhile, USD/JPY (^USDJPY) increased by +0.09%. The yen initially gained ground but ultimately fell to a 5.5-month low against the dollar. Higher Treasury yields and the rising dollar negatively impacted the yen. A +1.97% rise in the Nikkei Stock Index on Tuesday diminished the yen’s safe-haven appeal.
Early strength in the yen was attributed to comments from Japanese Finance Minister Kato, who expressed deep concern over recent currency market movements. He stated that Japan would take appropriate action if excessive fluctuations in the currency occurred. Officials in Japan remain vigilant about yen weakness and continue to threaten intervention to support the currency.
Moderate Gains for Precious Metals Amid Economic Shifts
February gold (GCG25) closed up +18.00 (+0.68%), while March silver (SIH25) rose by +0.103 (+0.34%). Precious metals saw moderate gains, with silver reaching a 2.5-week high. Increased demand from China supported gold prices after the People’s Bank of China expanded its gold reserves for a second consecutive month, raising holdings to 73.29 million troy ounces in December, from 72.96 million in November. Silver’s rally benefited from market support following the tariff plan proposed by Trump’s aides, aiming to minimize disruptions to global trade.
Geopolitical tensions, particularly surrounding the recent turmoil in Syria and the intensifying Ukraine-Russia conflict, have bolstered safe-haven demand for precious metals. However, stronger-than-expected US economic news contributed to the dollar’s rise and reduced the likelihood of further Fed interest rate cuts, which in turn pressured precious metals prices. Rising global bond yields similarly posed challenges for these assets.
On the date of publication, Rich Asplund did not hold any positions directly or indirectly in any of the securities mentioned in this article. All information is provided for informational purposes only. For further details, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein reflect those of the author and do not necessarily represent Nasdaq, Inc.
