Dollar Weakens Amid Mixed Economic Signals and Dovish Fed Comments

Key Economic Indicators Bring Mixed Results

The dollar index (DXY00) experienced a slight decline of -0.09% on Thursday. After an initial rally, the dollar retreated following dovish remarks from Fed Governor Waller. He indicated that if inflation decreases, the Federal Reserve may implement more rate cuts this year than currently anticipated by the market.

Economic Data Reflects a Mixed Bag

Recent US economic reports presented a mixed picture for the dollar. On a positive note, the January Philadelphia Fed business outlook survey exceeded expectations, climbing to a 3-3/4 year high. Additionally, the January NAHB housing market index rose unexpectedly to a 9-month peak. However, December retail sales growth was below expectations, and weekly jobless claims reported a larger-than-expected increase.

Initial unemployment claims for the US rose by +14,000, totaling 217,000, reflecting a weaker job market than the expected 210,000.

Retail sales for December increased by +0.4% month-over-month, falling short of the +0.6% forecast.

The Philadelphia Fed’s January business outlook survey surged from 55.2 to 44.3, far exceeding the expected decline to -5.0.

In December, the import price index excluding petroleum unexpectedly rose by +0.2% month-over-month, contrary to predictions of a -0.1% drop.

The NAHB housing market index, for January, unexpectedly climbed +1 to a 9-month high of 47, surpassing expectations for a decrease to 45.

Fed Governor’s Rate Comments Influence Markets

Governor Waller suggested that if inflation trends downward, the possibility of 3 to 4 rate cuts this year could increase, depending on subsequent data. Currently, the markets estimate only a 3% likelihood of a -25 basis point rate cut during the January 28-29 FOMC meeting.

Euro Strengthens Despite ECB Concerns

The EUR/USD (^EURUSD) posted a modest gain of +0.11% on Thursday, recovering from early losses as the dollar weakened. Initially, the euro dipped after the release of the December 11-12 ECB meeting minutes, which revealed discussions among some policymakers advocating a 50 basis point cut. Additionally, dovish comments from ECB Governing Council member Centeno raised concerns, noting that inflation is under control and rates are projected to decline.

The ECB meeting minutes indicated that while a -25 basis point cut was widely supported, some members pushed for a more aggressive reduction.

Centeno remarked, “If we look at the next months, quarters, year and a half, we see inflation clearly converging to values probably even slightly below 2%, and interest rates in the Eurozone will continue on a trajectory ideally to values also close to 2%.”

Swaps currently reflect a 98% probability of a -25 basis point cut by the ECB at its next meeting on January 30.

Japanese Yen Rebounds on Positive Outlook

The USD/JPY (^USDJPY) dropped by -0.79% on Thursday as the yen strengthened against the dollar. A Bloomberg report mentioned that the Bank of Japan (BOJ) sees a good chance of raising interest rates at its upcoming policy meeting. Additionally, Japanese producer prices rose at their fastest rate in 1-1/2 years, lending support to this hawkish outlook.

Japan’s December PPI increased by +3.8% year-over-year, matching expectations.

A Bloomberg report suggested that BOJ officials recognize the potential for a rate hike unless there are disruptions in the market or global economic expectations due to Trump’s presidency.

Precious Metals Gain Ground Amid Dovish Sentiment

February gold (GCG25) rose by +33.10 (+1.22%), while March silver (SIH25) gained +0.194 (+0.62%) on Thursday. Precious metals continued their upward trajectory, reaching 1-month highs as investors responded to softer core consumer price data from the UK and US, which could prompt rate cuts by the BOE and Fed. Gold also received support as a safe-haven investment, reflecting concerns heightened by the ongoing geopolitical tensions in the Middle East, the recent upheaval in Syria, and the escalated conflict in Ukraine.

On the date of publication, Rich Asplund did not hold positions in any of the securities mentioned in this article. 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.