Dollar Index Reaches Two-Year High Amid Labor Market Strength
The dollar index (DXY00) has climbed by +0.42%, hitting a new two-year peak. This surge can be attributed to positive indicators from the US labor market, where weekly jobless claims unexpectedly dropped to an eight-month low. Additionally, the dollar has gained traction against the euro, which has fallen to a two-year low amid concerns that US trade tariffs may severely impact Europe’s export-driven economies under the upcoming Trump administration. A revision of the US December S&P manufacturing PMI further bolstered the dollar by suggesting a robust economy.
Labor Market Shows Resilience
Weekly initial unemployment claims in the US saw a surprising decline of -9,000, bringing the total to 211,000—an eight-month low—contrary to predictions that claims would rise to 221,000.
Manufacturing PMI Revised Upwards
The US S&P manufacturing PMI for December was adjusted upward by +1.1 to 49.4, improving from the previously reported 48.3. However, November’s construction spending remained unchanged month-over-month, falling short of expectations for a +0.3% increase.
Market Rate Predictions
Currently, the markets estimate an 11% chance of a -25 basis point rate cut during the Federal Open Market Committee meeting scheduled for January 28-29.
Euro Under Pressure
The EUR/USD (^EURUSD) pair has dropped by -0.49%, reaching its lowest point in two years. The euro is experiencing pressure due to the Eurozone’s December S&P manufacturing PMI being revised downwards. Moreover, the strong dollar contrasts with expectations that the European Central Bank (ECB) may implement more aggressive interest rate cuts than the Federal Reserve. The Eurozone December S&P manufacturing PMI was revised downward by -0.1 to 45.1 from an earlier 45.2.
ECB Rate Cut Expectations
Swaps indicate a 100% chance of a -25 basis point rate cut by the ECB at its meeting on January 30, with an 11% chance of a -50 basis point cut at that time.
Yen Moves Higher
The USD/JPY (^USDJPY) has decreased by -0.17%. The yen’s rise against the dollar comes in response to declining Treasury note yields and speculation that the Bank of Japan (BOJ) is likely to increase interest rates in its upcoming policy meeting. Trading volume for the yen is lower than average, with financial markets in Japan shut down for the New Year’s holiday.
There are additional supportive factors for the yen, including the potential for Japanese government intervention in the foreign exchange market. Recently, Finance Minister Kato remarked that the government would take “appropriate” measures to address excessive fluctuations in the currency market, following a sharp drop of the yen to a 5.5-month low against the dollar.
Precious Metals Gain Ground
February gold (GCG25) has risen by +20.00 (+0.76%), while March silver (SIH25) has increased by +0.583 (+1.99%). Precious metals are experiencing moderate gains, driven by a decline in global bond yields, which typically supports higher prices for these commodities. Investor expectations of further interest rate cuts by the Fed and ECB also enhance gold’s attractiveness as a store of value. Demand for precious metals remains strong due to geopolitical instability, notably the recent turmoil in Syria and ongoing tensions in the Ukraine-Russia conflict.
Although today’s dollar rally to a two-year high typically bears adverse effects on metal prices, the stock market’s upward trend has lessened the safe-haven demand for these commodities. A decline in China’s December Caixin manufacturing PMI, which unexpectedly fell -1.0 to 50.5—below the anticipated 51.7—could negatively impact demand for industrial metals like silver.
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 here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
