Dollar Strengthens on Positive Economic News; Eurozone Forecasts Adjusted
US Economic Data and Fed Outlook Boost Dollar Value
The dollar index (DXY00) climbed by +0.37% on Friday, recovering from initial losses to finish with moderate gains. Positive reports on December housing starts and manufacturing production bolstered confidence in the dollar. Additionally, the International Monetary Fund (IMF) increased its 2025 GDP forecast for the US due to stronger demand, which provided further support. Cleveland Fed President Hammack’s statements hinted that the Fed might be “very patient” regarding future interest rate cuts, reinforcing a bullish sentiment for the dollar.
Housing and Manufacturing Data Exceeds Expectations
December housing starts in the US surged by +15.8% month-over-month, reaching a 10-month high of 1.499 million, well above the expected 1.327 million. Meanwhile, December building permits, a key indicator for future construction activity, fell slightly by -0.7% to 1.483 million, outperforming the anticipated drop to 1.460 million.
Manufacturing production also showed promising growth, increasing by +0.6% month-over-month, exceeding expectations of +0.2%. This marks the largest production rise in four months.
IMF Updates Global Economic Forecasts
The IMF raised its global GDP forecast for 2025 to 3.3%, up from 3.2% previously, attributing the increase to stronger demand in the US. Specifically, the IMF adjusted its US GDP projection for 2025 to 2.7%, up from 2.2%, while cutting the Eurozone’s forecast to 1.0% from 1.2%.
Market expectations for a -25 basis point rate cut at the upcoming January 28-29 FOMC meeting are currently placed at just 1%.
Euro Weakens Amid Economic Adjustments
The euro fell by -0.23% on Friday, retracting earlier gains as the dollar strengthened. This decline was influenced by the IMF’s downward revision of the Eurozone’s 2025 GDP estimate. Initially, the euro had shown some strength following hawkish comments from European Central Bank (ECB) Governing Council member and Bundesbank President Nagel, who warned against hasty monetary policy normalization given the continuing inflation issues.
Market swaps currently indicate a 99% probability of a -25 basis point rate cut by the ECB during its next meeting on January 30.
Yen Declines as Bond Yields Drop
The USD/JPY (^USDJPY) pair rose by +0.64% on Friday, while the yen fell back from a four-week high. This drop was fueled by declining Japanese government bond yields, particularly after the 10-year JGB bond yield decreased to a one-week low of 1.178%. Initial gains for the yen following positive news about potential rate hikes were overshadowed by the broader market movements.
Precious Metals Decline Due to Strong Dollar
February gold (GCG25) closed down -2.20 (-0.08%) and March silver (SIH25) fell -0.584 (-1.84%). Precious metals experienced declines primarily attributed to the strong dollar and hawkish central bank rhetoric from the ECB. Additionally, a ceasefire agreement in the Middle East eased safety demands for these commodities.
Despite these losses, lower global bond yields provided some support. Geopolitical tensions, especially from the ongoing conflict in Ukraine and recent turmoil in Syria, continue to sustain safe-haven demand for precious metals. Furthermore, optimistic economic data from the US and China spurred demand for industrial metals like silver, following a better-than-expected US housing starts and manufacturing production report. China’s Q4 GDP grew by +5.4% year-over-year, marking its fastest growth in six quarters, along with a +6.2% increase in December industrial production—both exceeding forecasts.
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.
