Dollar Index Hits Two-Year High Amid Economic Woes in Europe

The dollar index (DXY00) increased by +0.55% on Friday, reaching a two-year high. Weak economic data from the Eurozone signals trouble in the European economy, which benefits the dollar. Meanwhile, gains in the dollar were somewhat limited after the University of Michigan’s consumer sentiment index showed an unexpected decline.

U.S. Economic Indicators Show Mixed Results

For November, the S&P manufacturing PMI for the U.S. rose by +0.3, reaching a four-month high of 48.8, slightly missing expectations of 48.9. In contrast, the S&P services PMI elevated by +2.0 to 57.0, exceeding the forecast of no change at 55.0, marking the fastest expansion rate in two and a half years.

Consumer Sentiment Falls Short

However, the University of Michigan’s consumer sentiment index dipped by -1.2 to 71.8, falling short of expectations for an increase to 73.9.

Market Anticipates Potential Rate Cuts

Market expectations now place a 53% chance of a -25 bp rate cut during the Federal Open Market Committee (FOMC) meetings on December 17-18.

Euro Faces Pressure with Growing Rate Cut Speculation

The EUR/USD (^EURUSD) pair fell by -0.61%, reaching a nearly two-year low. The euro weakened due to disappointing Eurozone PMI data and revised German GDP numbers, with increased expectations for a -50 bp rate cut by the European Central Bank (ECB) next month, now estimated at 48% from just 17% previously. Additionally, the decline of the 10-year German bund yield to a one-month low diminished the euro’s attractiveness amid rising interest rates.

Eurozone Economic Data Disappoints

In November, the Eurozone’s S&P manufacturing PMI dropped by -0.8 to 45.2, below the anticipated steady reading of 46.0. The composite PMI also fell by -1.9 to 48.1, showing the steepest contraction in ten months.

On a related note, Germany’s Q3 GDP was revised downward to +0.1% quarter-over-quarter and -0.3% year-over-year from the previously reported +0.2% and -0.2%, respectively.

Swaps Signal Confidence in ECB Rate Cuts

Swaps markets are pricing in a 100% chance of a -25 bp cut from the ECB in their meeting on December 12, with a 48% chance for a deeper -50 bp cut.

Yen Experiences Slight Increase Amid Global Tensions

The USD/JPY (^USDJPY) rose by +0.18% as the yen faced moderate losses. The Nikkei Stock Index’s gains diminished safe-haven demand for the yen, compounded by comments from the Bank of Japan (BOJ) signaling no immediate rate hikes. However, news of Japan’s National Core CPI rising more than expected provided some support, along with lower Treasury yields aiding the yen amidst ongoing global tensions.

Japan’s October national CPI eased to +2.3% year-over-year from +2.5% in September, aligning with predictions. Nevertheless, the CPI excluding fresh food and energy rose to +2.3%, exceeding expectations of +2.2% and marking the largest increase in six months.

Mixed signals emerged from Japan’s November PMI reports, with the Jibun Bank manufacturing PMI declining by -0.2 to 49.0, while the services PMI climbed by +0.5 to 50.2.

Precious Metals Rally Amid Safe-Haven Demand

December gold (GCZ24) closed up +37.30 (+1.39%) on Friday, and December silver (SIZ24) rose by +0.395 (+1.28%). Precious metals saw moderate gains due to heightened safe-haven demand after Ukraine reported Russian missile strikes, alongside the potential for a larger ECB rate cut in light of disappointing economic data.

Dollar Strength Puts Pressure on Metal Prices

Despite the rally in the dollar index, which is bearish for metal prices, the S&P 500’s increase to a one-week high reduced the need for safe-haven assets. Additionally, the decline in Eurozone PMIs and revised German GDP numbers negatively affected industrial metals demand, contributing further to silver’s price pressures.

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
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.