Dollar Index Hits Two-Year High Amid Strong U.S. Economic Signals
U.S. Dollar Gains Ground on Positive Employment Report
The dollar index (DXY00) rose by +0.23% on Monday, reaching a new two-year high. This increase followed last Friday’s better-than-expected U.S. payroll report for December, which reduced the likelihood of upcoming Federal Reserve rate cuts. Additionally, higher bond yields supported the dollar’s appeal, as the 10-year Treasury note yield climbed to a 14-month high. However, the dollar softened from its peak as the stock market recovered from initial heavy losses, resulting in less demand for the currency.
Current market sentiment suggests a mere 3% chance of a -25 basis point rate cut during the FOMC meeting scheduled for January 28-29.
Euro Declines as Dovish ECB Comments Weigh Heavily
The EUR/USD (^EURUSD) fell by -0.29%, hitting another two-year low. The strength of the dollar negatively impacted the euro, especially after the U.S. payroll data pointed towards fewer Fed rate cuts. Additionally, dovish remarks from the European Central Bank (ECB) further diminished the euro. ECB Governing Council member Rehn stated that more rate cuts are necessary, supporting this downward trend. However, the euro’s downturn was somewhat moderated by a rise in the 10-year German bund yield, which reached a six-and-a-quarter month high, strengthening the euro’s interest rate outlook.
Rehn commented, “Given that disinflation seems to be progressing and growth is weakening, it is reasonable for the ECB to continue with rate cuts.”
Market swaps are currently indicating a 95% likelihood of a -25 basis point rate cut by the ECB during its next meeting on January 30.
Yen Stalls as Safe-Haven Demand Dwindles
The USD/JPY (^USDJPY) experienced a slight rise of +0.02% on Monday. The yen initially gained ground but ultimately remained flat as stocks rebounded, diminishing the usual safe-haven demand for the currency. Higher Treasury yields also contributed to the yen’s struggle. Notably, trading volume was lower than usual due to Japan’s holiday for Coming-of-Age Day.
Precious Metals Under Pressure from Dollar Strength
February gold (GCG25) closed down -36.40 (-1.34%), while March silver (SIH25) fell by -1.005 (-3.21%). The strength of the dollar put significant pressure on precious metals, which also faced headwinds from higher global bond yields. The negative sentiment in precious metals was further exacerbated by Friday’s robust U.S. payroll data, hinting at fewer Fed rate cuts. As stocks bounced back from earlier declines, demand for safe-haven assets decreased.
Geopolitical Unrest Keeps Gold Demand Afloat
Despite the overall downward trend, gold received some support from central bank comments, with ECB member Rehn’s remarks spurring interest in gold as an inflation hedge. The precious metals market has continued to benefit from safe-haven demand due to ongoing geopolitical tensions, particularly the collapse of the Syrian government and the Ukraine-Russia conflict. A boost in silver prices was aided by encouraging trade data from China, revealing a +10.7% year-over-year increase in December exports—surpassing expectations of +7.5%—which is promising for industrial metals demand.
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
