Dollar Index Surges to 6-Month High Amid Inflation Speculation
The dollar index (DXY00) has shown strength today, rising by +0.43% and reaching a 6-3/4 month high. Early losses were reversed as the index continues to benefit from a post-election rally. This shift is fueled by speculation that Treasury yields will rise as inflation expectations increase, influenced by President-elect Trump’s pro-tariff policies. Initially, the dollar dipped when T-note yields fell following the US October Consumer Price Index (CPI) report, which met expectations. This report decreased the odds of an interest rate increase by the Federal Reserve next month, projecting an 82% chance of a 25 basis point cut, up from 62% before the report.
Consumer Prices Steady in October
In October, US CPI rose by +0.3% month-over-month and +2.6% year-over-year, aligning with market expectations. Excluding food and energy, the CPI also held steady at +3.3% year-over-year, consistent with prior data.
Federal Reserve Officials Weigh In
Minneapolis Fed President Neel Kashkari stated that inflation is moving in the right direction and does not believe it will remain above the Fed’s 2% target. Meanwhile, Dallas Fed President Lorie Logan expressed concerns over the need for additional rate cuts, advising caution due to uncertain economic conditions. Current market expectations suggest an 82% chance of a 25 basis point reduction at the FOMC meeting on December 17-18.
Euro Slides Amid Economic Concerns
In currency markets, the EUR/USD (^EURUSD) fell by -0.52% to a one-year low. Dollar strength is negatively impacting the euro. Comments from ECB Governing Council member Joachim Nagel added pressure, as he indicated that President-elect Trump’s tariff strategies could lead to a 1% reduction in Germany’s GDP, potentially prompting economic contraction. Initially, the euro saw a brief uptick following the benign US CPI report, which was later offset by Nagel’s remarks highlighting persistent price pressures in core inflation.
Potential ECB Rate Cuts Considered
Swaps reflect a full 100% probability of a 25 basis point rate cut by the ECB in its upcoming December 12 meeting, and a 23% chance of a deeper 50 basis point cut.
Yen Weakens on Policy Speculation
The USD/JPY (^USDJPY) increased by +0.30% as the yen weakened to a 3-1/2 month low. Speculation about President-elect Trump’s policies potentially influencing inflation and the Fed’s approach to interest rates contributed to this decline. The yen had previously gained momentum following a stronger-than-expected Japanese October Producer Price Index (PPI) report. Japan’s PPI rose by +0.2% month-over-month and +3.4% year-over-year, surpassing expectations of stability month-over-month and a +2.9% year-over-year increase.
Precious Metals Retreat
December gold (GCZ24) is down -2.20 (-0.08%), and December silver (SIZ24) is down -0.014 (-0.05%). Precious metals lost ground after initially rising, with the dollar’s recovery contributing to this trend. Nagel’s comments about elevated core inflation, along with stronger-than-expected Japanese inflation data, added to bearish sentiment. Furthermore, the slide in copper prices contributed negatively to silver’s performance.
Despite a positive start from a moderately dovish US CPI report, precious metals remain under pressure as market dynamics shift. Demand for gold as an inflation hedge may persist, especially with expectations that the Trump administration will bring forward tax cuts, higher tariffs, and deregulation, intensifying inflation concerns. Ongoing geopolitical tensions in the Middle East also keep safe-haven demand for precious metals high.
More Precious Metal News from Barchart
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.
