The dollar index (DXY00) Wednesday rose by +0.33% and posted a 1-3/4 month high. Strength in T-note yields Wednesday was supportive of the dollar. Also, positive comments from Fed Vice Chair Jefferson boosted the dollar when he said the US economy is growing at a "solid pace." In addition, the dollar found support in comments from Dallas Fed President Logan, who said she favored a gradual pace of Fed easing. The Sep 17-18 FOMC meeting minutes were neutral for the dollar. The dollar fell back from its best levels after the S&P 500 posted a new record high, which reduced liquidity demand for the dollar.
Tuesday evening, Fed Vice Chair Jefferson said the US economy is growing at a "solid pace" even as the labor market has slowed from an overheated state. He added that inflation is much closer to the Fed's 2% target and should continue to cool toward it.
Dallas Fed President Logan said, "Following last month's half-percentage point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals."
The minutes of the Sep 17-18 FOMC meeting stated that "almost all" officials agreed that the upside risks to inflation have diminished, while downside risks to employment have increased. Also, a "substantial majority" of Fed officials backed the decision to cut interest rates by 50 bp, but "some" said they would have preferred a 25 bp cut.
The markets are discounting the chances at 83% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 0% for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Wednesday fell by -0.36% and posted a 1-3/4 month low. Dollar strength Wednesday weighed on the euro. Also, dovish comments Wednesday from ECB Governing Council members Kazaks and Villeroy de Galhau Nagel pressured the euro when they signaled their support for additional ECB interest rate cuts.
German trade news was mixed. Aug exports unexpectedly rose +1.3% m/m versus expectations of a decline of -1.0% m/m. Conversely, Aug imports fell -3.4% m/m, weaker than expectations of -2.0% m/m.
ECB Governing Council member Villeroy de Galhau said an interest rate cut by the ECB next week "is very probable, and it won't be the last, but the following pace will simply depend on the evolution of the fight against inflation."
ECB Governing Council member Kazaks said interest rates must be lowered further due to the weakening economy in the Eurozone.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 94% for the October 17 meeting and 100% for that -25 bp rate cut at the December 12 meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.73%. The yen on Wednesday dropped to a 1-3/4 month low against the dollar on weak Japanese economic news that showed Japan’s Sep machine tool orders fell by the most in 5 months. Also, comments from former BOJ executive Maeda undercut the yen when he said the BOJ wouldn’t raise interest rates again until January. In addition, higher T-note yields on Wednesday weighed on the yen.
Japan Sep machine tool orders fell -6.5% y/y, the biggest decline in 5 months.
Former BOJ executive Maeda said that January is “the most likely” timing for the next BOJ interest rate increase when the BOJ releases its latest economic projections.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 3% for the October 30-31 meeting and at +24% for that +10 bp rate hike at the December 18-19 meeting.
December gold (GCZ24) Wednesday closed down -9.40 (-0.36%), and December silver (SIZ24) closed up +0.070 (+0.23%). Precious metals Wednesday settled mixed. Wednesday’s rally in the dollar index to a 1-3/4 month high was bearish for metals. Also, higher T-note yields Wednesday and the rally in stocks were bearish factors for precious metals. Silver prices also have some negative carryover from Wednesday’s slide in copper prices to a 2-week low.
Dovish central bank comments on Wednesday were supportive of precious metals. Fed Vice Chair Jefferson said inflation is much closer to the Fed's 2% target and should continue to cool toward it. Also, ECB Governing Council member Villeroy de Galhau said an interest rate cut by the ECB next week "is very probable, and it won't be the last. In addition, precious metals have continued safe-haven demand from Middle East tensions, with the markets awaiting Israel’s response to last Tuesday’s missile barrage from Iran.
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.
