U.S. Dollar Retreats as Markets React to Economic Indicators
Dollar’s drop follows comments from Richmond Fed President, despite positive manufacturing data.
The dollar index (DXY00) fell by -0.42% on Friday, retreating from a two-year high reached on Thursday. The uptick in stock strength led to decreased demand for the dollar, driving its losses further. Additionally, dovish remarks from Richmond Fed President Barkin suggested that the Federal Reserve may not need to maintain its previously tight policies. However, the dollar received a temporary lift from rising Treasury note yields due to a surprisingly strong US December ISM manufacturing index, which suggests a more hawkish stance for Fed policy.
The ISM manufacturing index for December recorded an unexpected rise of +0.9, reaching a nine-month high of 49.3, while analysts had anticipated a drop to 48.2.
In his comments, Richmond Fed President Barkin noted, “Inflation is not yet back to target, so we still have more work to do, but we don’t think we need to be as restrictive as we once were to finish that job.” Markets currently assign an 11% probability for a -25 basis point rate cut during the FOMC meeting scheduled for January 28-29.
The euro saw a rise on Friday, with EUR/USD (^EURUSD) gaining +0.41%. This rebound from a two-year low stemmed from the dollar’s weakening, alongside favorable German labor market data which bolstered the euro further.
In December, Germany reported a labor change increase of +10,000, outperforming expectations that predicted a rise of +15,000. The unemployment rate remained steady at 6.1%, slightly better than the anticipated increase to 6.2%.
Swaps are pricing in a 100% chance of a -25 basis point rate cut by the European Central Bank at its next meeting on January 30, and a 7% chance for a deeper cut of -50 basis points during the same meeting.
Meanwhile, the USD/JPY (^USDJPY) experienced a decline of -0.22% as the yen strengthened on speculation that the Bank of Japan (BOJ) might hike interest rates at its upcoming meeting. However, the yen’s gains were somewhat limited after T-note yields reversed their earlier decline and climbed higher in response to the robust US manufacturing report. Trading volume for the yen was hampered by Japan’s bank holiday.
Support for the yen also stemmed from the potential for government intervention, with Japanese Finance Minister Kato indicating that the government would act against excessive fluctuations in the forex market after the yen dropped to a five-and-a-half month low against the dollar last Thursday.
In the commodities sector, February gold (GCG25) closed down -14.30 (-0.54%), while March silver (SIH25) managed a slight increase, closing up +0.165 (+0.55%). Precious metals ended the day mixed, as gold prices fell from a two-and-a-half week high due to reduced demand as stocks rallied. The stronger-than-expected ISM manufacturing report also contributed to higher T-note yields, applying downward pressure on gold prices.
Despite a weaker dollar potentially supporting metal prices, gold faces challenges from diminished safe-haven demand. Expectations that both the Fed and ECB will continue cutting rates have spurred interest in gold as a store of value. Furthermore, geopolitical tensions from recent developments in Syria and ongoing conflicts in Ukraine and Russia continue to support precious metals. Silver also benefited from the strong US December ISM manufacturing data and positive German labor news, signaling a good outlook 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
here.
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