Dollar Weakens on Mixed US Economic Data Amid European Political Uncertainty
The dollar index (DXY00) has dipped by -0.09% today, reversing early gains as weak US economic reports dampened investor confidence. The November ADP employment change increased by +146,000, falling short of the expected +150,000, while the November ISM services index dropped significantly by -3.9, settling at 52.1—far below the anticipated 55.3.
Earlier, the dollar strengthened due to a weakening euro, driven by concerns over a no-confidence vote in France that could destabilize the government. Support for the dollar also came from St. Louis Fed President Musalem’s hawkish remarks, indicating that it may soon be time for the Fed to reconsider the pace of interest rate cuts.
The US November ADP employment change figure represented a decline from October’s revised total of +184,000, which was lowered from the previously reported +233,000. Meanwhile, US factory orders for October matched expectations with a +0.2% month-over-month increase.
In his statements, Fed President Musalem commented, “The time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information, and evolving outlook.” Market sentiments currently reflect a 76% probability of a -25 basis point rate cut during the upcoming December 17-18 FOMC meeting.
The euro, trading at EUR/USD (^EURUSD), has slightly climbed today by +0.21%. This recovery comes after early losses spurred by negative economic news from the US, which affected the dollar and prompted short covering in the euro. Also aiding the euro was an upward revision to the Eurozone’s November S&P composite PMI, which was adjusted from 48.1 to 48.3.
Initially, the euro faced downward pressure due to the political unrest in France, where Marine Le Pen’s National Rally party supported a no-confidence motion submitted by a leftist coalition. The European Central Bank’s (ECB) Governing Council member Rehn added to the euro’s drama by indicating that the ECB would continue to ease policy in the future.
In related news, ECB member Rehn pointed out that inflation has reached the targeted 2% and highlighted the fragile state of Eurozone economic growth, suggesting that this could support a possible benchmark rate cut in December. Swaps now reflect a 100% likelihood of a -25 basis point cut at the ECB’s meeting on December 12, with a 9% chance for a -50 basis point reduction.
The USD/JPY (^USDJPY) pair is up by +0.66% amid rising Treasury yields, which have put pressure on the yen. A decline in Japan’s government bond yields has weakened interest rate differentials, with the 10-year JGB bond yield dropping to 1.045%—its lowest in three weeks. However, the yen did bounce back somewhat after disappointing US economic data lowered dollar strength.
In precious metals, February gold (GCG25) is currently up +6.00 (+0.22%), and March silver (SIH25) has increased by +0.258 (+0.82%). Both metals are drawing support from safe-haven demand amidst ongoing political turmoil in South Korea and France. Demand for gold as a reliable store of value has been bolstered by comments from ECB member Rehn about continued easing in monetary policy. The escalating conflict between Ukraine and Russia has also contributed to increasing safe-haven interest in precious metals.
Nonetheless, the dollar’s strength is restraining potential gains in these markets. Furthermore, a rally in the S&P 500 to record highs has diminished some of the safe-haven demand for precious metals, alongside rising Treasury yields, which traditionally exert a negative influence on metal prices.
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.
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