Dollar Index Declines Amid Mixed Economic Data and Stock Market Strength
Manufacturing and Services Reports Influence Currency Fluctuations
The dollar index (DXY00) dropped by -0.14% on Monday as strong stock performance reduced the demand for liquidity in the dollar market. However, the dollar’s losses were somewhat restrained as Treasury note yields increased, improving the dollar’s interest rate differentials. Economic indicators released on Monday presented a mixed picture for the dollar. A measure of manufacturing activity fell short of expectations, while a gauge for services activity showed stronger growth than anticipated.
The US December Empire State manufacturing survey reported a decline of -31.0, landing at 0.2, which was below forecasts of 10.0.
Similarly, the US December S&P manufacturing PMI fell by -1.4 to 48.3, missing expectations of 49.5. On a more positive note, the December S&P services PMI jumped by +2.4 to 58.5, surpassing expectations of 55.8.
The markets currently anticipate a 95% chance of a -25 basis point rate cut at the upcoming December 17-18 FOMC meeting.
Eurozone Economic Developments: Credit Rating Downgrade and Mixed PMIs
The euro (EUR/USD) rose by +0.07% on Monday, recovering from earlier declines after a phase of dollar weakness triggered short covering. The currency reacted negatively earlier in the day when Moody’s Ratings downgraded France’s credit rating. Additionally, dovish statements from ECB President Christine Lagarde suggested potential further interest rate cuts as inflation nears the ECB’s 2% target.
In Eurozone news, the December S&P manufacturing PMI remained unchanged at 45.2, which fell short of expectations of 45.3. However, the December S&P composite PMI unexpectedly increased by +1.2 to 49.5, better than the anticipated drop to 48.2.
Moreover, Eurozone Q3 labor costs eased to +4.6%, down from +5.2% in Q2.
Lagarde remarked, “If the incoming data continue to confirm our baseline, the direction of travel is clear, and we expect to lower interest rates further.”
Following Moody’s downgrade, France’s credit rating was adjusted from Aa2 to Aa3, with the agency noting that France’s public finances are expected to weaken significantly in the coming years.
Swaps now anticipate a 100% likelihood of a -25 basis point rate cut by the ECB at its next meeting on January 30, with a 7% chance of a more significant -50 basis point cut.
Yen Movement and Economic Data from Japan
In the currency market, USD/JPY rose by +0.30% on Monday. The yen slid to a 2.5-week low against the dollar after experiencing losses for six consecutive sessions. This dip is attributed to a Reuters report suggesting the Bank of Japan will likely maintain steady interest rates during its upcoming meeting. Still, lower Treasury note yields on Monday helped to limit the yen’s losses.
Japan’s October core machine orders increased by +2.1% month-over-month, surpassing expectations of +1.1%.
The Japan December Jibun Bank manufacturing PMI rose by +0.5 to 49.5, while the December services PMI gained +0.9 to 51.4. Furthermore, the October tertiary industry index improved by +0.3% month-over-month, against expected declines of -0.1%.
Precious Metals Market Responses to Economic Developments
February gold (GCG25) closed down -5.80 (-0.22%) on Monday, whereas March silver (SIH25) saw a modest increase of +0.029 (+0.09%). Overall, precious metals displayed mixed performance influenced by dollar fluctuations. Lower global bond yields provided support for metals prices. Gold, in particular, is bolstered by a growing demand as a safe haven, especially following comments from Lagarde regarding ongoing rate cuts amidst declining inflation. Anticipations of a -25 basis point cut from the Fed after Wednesday’s FOMC meeting further support precious metals.
However, the strong stock market performance on Monday reduced safe-haven demand for these assets. Silver prices faced downward pressure as the US and Eurozone’s weaker-than-expected manufacturing PMIs indicated a potential decline in industrial metals demand. Compounding this, new home prices in China fell -0.2% month-over-month for November, marking the eighteenth consecutive monthly decline and signaling troubles in 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 are 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.
