Dollar Index Hits One-Year High Amid Strong U.S. Economic Data
Jobless Claims Drop and PPI Rises, Influencing Federal Reserve Outlook
The dollar index (DXY00) has increased by +0.04%, achieving a new one-year high. Today’s positive U.S. economic news suggests that the Federal Reserve may not pursue significant interest rate cuts, which bodes well for the dollar. Recent weekly jobless claims decreased to a 5-1/2 month low, while the producer price index (PPI) for October rose more than anticipated, both serving as hawkish indicators for Fed policy. However, the dollar pulled back from its peak as Treasury note yields fell from an early high, impacting the dollar’s interest rate appeal.
Weekly initial unemployment claims in the U.S. fell by -4,000, landing at 217,000—below expectations of 220,000. This drop indicates a stronger labor market.
For October, the PPI final demand increased +2.4% year-over-year, surpassing expectations of +2.3%. Excluding food and energy, the PPI rose by +3.1% year-over-year, also above the +3.0% anticipated.
Current market estimates suggest a 76% chance of a -25 basis point rate cut at the upcoming December 17-18 Federal Open Market Committee meeting.
Eurozone Economic Challenges Affect the EUR/USD
The EUR/USD (^EURUSD) has seen a slight recovery, rising +0.07% after hitting a 13-month low. This rebound is largely due to short-covering, as declining Treasury note yields pulled the dollar down and lifted the euro.
Initially, the euro faced downward pressure following a report showing a significant decline in Eurozone industrial production for September—the largest drop in eight months. Additionally, comments from ECB Vice President Guindos indicated that the economic recovery in the Eurozone is weaker than previously expected. The dovish minutes from the ECB’s October 16-17 meeting further added to the euro’s woes.
Industrial production in the Eurozone fell by -2.0% month-over-month, significantly worse than the anticipated decline of -1.4%.
ECB’s Dovish Outlook Increases Pressure on Euro
Vice President Guindos remarked that the anticipated economic recovery in the Eurozone “is not happening with the intensity we expected.” The ECB’s meeting minutes from mid-October suggested a consensus among policymakers that inflation may continue to decline, indicating a shift towards disinflation.
Based on market swaps, there is currently a 100% probability of a -25 basis point rate cut by the ECB during its meeting on December 12, with a 26% chance of a more aggressive -50 basis point cut.
Yen Weakens Amid U.S. Political Landscape
The USD/JPY (^USDJPY) has risen by +0.304%, with the yen hitting a new 3-1/2 month low against the dollar. Concerns regarding a sweep by Republicans in the upcoming elections could pave the way for inflationary policies from President-elect Trump, making further Fed rate cuts less likely and supporting the dollar’s strength. The yen did recover somewhat as Treasury note yields fell, prompting some traders to close short positions.
Precious Metals Under Pressure
Currently, December gold (GCZ24) is down -11.20 (-0.43%) and December silver (SIZ24) has decreased -0.193 (-0.65%). Precious metals are feeling the strain, with both gold and silver hitting two-month lows. The dollar index achieving a one-year high is prompting long positions in precious metals to be liquidated. Additionally, strong U.S. economic data showing a decline in weekly jobless claims and an unexpected rise in October PPI has negative implications for these metals.
However, precious metals did manage to recover slightly from their lowest points after Treasury yields decreased. Demand for gold as a hedge against inflation might persist, particularly if the Republicans gain control of Congress, facilitating the Trump administration’s policy goals that could lead to an inflation surge. Furthermore, ongoing conflicts in the Middle East have heightened safe-haven demand for precious 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
