Dollar Hits a Two-Week Low Amid Mixed Economic Signals
US economic reports and international factors weigh on the dollar as it declines sharply against major currencies.
The dollar index (DXY00) dropped by -0.86% on Wednesday, reaching a two-week low. The euro and the yen gained strength, resulting in a less favorable position for the dollar. Additionally, mixed economic news from the US caused Treasury note yields to fall, further weakening the dollar’s attractiveness in terms of interest rates.
In the third quarter, the US GDP remained steady at 2.8% (quarter-over-quarter annualized), matching expectations. However, personal consumption was revised down by -0.2 to 3.5%, down from an earlier 3.7%. The Q3 core PCE price index also saw a slight decrease of -0.1, now standing at 2.1%, previously 2.2%.
Another concerning report was the unexpected decline in US October capital goods orders, excluding defense, which fell by -0.2% month-over-month. This contrasted expectations for a modest rise of +0.1%.
On a more positive note, initial unemployment claims in the US unexpectedly dropped by 2,000, hitting a seven-month low of 213,000, surpassing predictions of 215,000. Nevertheless, continuing claims rose by +9,000 to a three-year high of 1.907 million, indicating potential weakness in the labor market as the expectations had been for a drop to 1.892 million.
Additionally, the MNI Chicago PMI for November unexpectedly fell by -1.4 to 40.2, marking the steepest contraction in six months and falling short of expectations for an uptick to 45.0.
In terms of consumer behavior, US personal spending in October rose +0.4% month-over-month, as predicted. Personal income increased by +0.6%, exceeding expectations of +0.3%.
Moreover, the core PCE price index for October, which the Federal Reserve closely monitors, increased by +0.3% month-over-month and +2.8% year-over-year, aligning with forecasts.
Meanwhile, pending home sales in the US unexpectedly surged by +2.0% month-over-month, defying expectations for a -2.0% decline.
Market analysts currently estimate a 70% chance of a -25 basis point rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for December 17-18.
The euro gained value, with the EUR/USD (^EURUSD) rising by +0.68% and reaching a one-week high. This increase followed comments from ECB Executive Board member Isabel Schnabel, who cautioned against drastic cuts to interest rates. However, a weaker than expected German consumer confidence index for December added some downward pressure on the euro.
The German GfK consumer confidence index for December dropped -4.9 to -23.3, a seven-month low, originally expected to be at -18.8.
In the context of interest rate speculation, there is a complete consensus (100%) for a -25 basis point cut from the ECB at its December 12 meeting, with a 16% probability for a more aggressive -50 basis point reduction.
Turning to Japan, the USD/JPY (^USDJPY) declined by -1.25%, as the yen achieved a five-week high against the dollar. The yen’s strength was supported by falling Treasury note yields, along with a divergence in monetary policy outlooks between the Fed and the Bank of Japan, where expectations indicate a Fed rate cut juxtaposed with a potential BOJ rate increase.
In the commodities market, December gold (GCZ24) finished up by +18.60 (+0.71%), while December silver (SIZ24) decreased by -0.294 (-0.97%). The mixed performance for precious metals was influenced by the dollar’s slump to a two-week low, which is generally favorable for these assets, alongside a decline in global bond yields. The ongoing Ukraine-Russia conflict has also bolstered safe-haven demand for precious metals.
However, precious metal gains were limited by hawkish remarks from Schnabel regarding potential risk in cutting rates too far and a reduction in geopolitical tensions in the Middle East, as recent agreements between Israel and Hezbollah led to a 60-day halt in hostilities. Additionally, silver faced pressures from the disappointing October capital goods orders report and the significant contraction in the MNI Chicago PMI, both of which suggest weakening demand for industrial metals.
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.
