The dollar index (DXY00) Monday fell by -0.43%. Strength in equity markets Monday reduced liquidity demand for the dollar. Also, a rally in the yen to a 2-1/2 week high against the dollar weighed on the dollar on a report the BOJ may lift its yield cap on the 10-year JGB bond yield target range. In addition, the dollar is under pressure on the likelihood that the Fed will keep its monetary policy unchanged at the Tue-Wed FOMC meeting. Rising T-note yields Monday provided underlying support for the dollar.
Monday’s U.S. economic news was bearish for the dollar after the Oct Dallas Fed manufacturing activity index unexpectedly fell by -1.1 to -19.2, weaker than expectations of an increase to -16.0.
The markets are discounting a zero percent chance that the FOMC will raise the funds rate by +25 bp at this week’s FOMC meeting (Tue/Wed), an 18% chance for that +25 bp rate hike at the following meeting on Dec 12-13, and a 10% chance for that +25 bp rate hike at the FOMC meeting after that on Jan 30-31, 2024. The markets are then expecting the FOMC to begin cutting rates later in 2024 in response to an anticipated slowdown in the U.S. economy.
EUR/USD (^EURUSD) rose by +0.50%. A weaker dollar on Monday was supportive of the euro. EUR/USD also garnered support on Monday’s news that German Q3 GDP contracted less than expected and Eurozone Oct economic confidence fell less than expected. On the bearish side for the euro was Monday’s decline in the 10-year German bund yield to a 2-week low and the smaller-than-expected increase in German Oct CPI, a dovish factor for ECB policy.
Eurozone Oct economic confidence fell -0.1 to 93.3, stronger than expectations of 93.0.
German Q3 GDP fell -0.1% q/q, stronger than expectations of -0.2% q/q.
German Oct CPI (EU harmonized) eased to +3.0% y/y from +4.3% y/y in Sep, better than expectations of +3.3% y/y and the smallest increase in 2-1/4 years.
ECB comments on Monday were mixed for the euro. On the bullish side, ECB Governing Council member Kazimir said, "Bets on ECB interest rate cuts happening in the first half of next year are entirely misplaced," and the ECB "will have to stay at the peak for the next few quarters." Conversely, ECB Governing Council member Simkus believes the ECB won't need to increase interest rates at its December policy meeting, saying, "the current restrictive levels are sufficient."
USD/JPY (^USDJPY) fell by -0.39%. The yen on Monday recovered from early losses and climbed to a 2-1/2 week high against the dollar. The yen rallied on a report from Nikkei that the BOJ, as soon as this Friday’s policy meeting, is considering lifting the yield cap on its 10-year JGB yield target range to above 1.0%. The yen also found support Monday after the 10-year JGB bond yield rose to a new 10-year high at 0.897%, which strengthened the yen’s interest rate differentials. The yen Monday initially posted moderate losses as rising T-note yields weighed on the yen.
December gold (GCZ3) Monday closed up +7.10 (+0.36%), and Dec silver (SIZ23) closed +0.509 (+2.22%). Precious metals prices on Monday settled moderately higher, with silver climbing to a 1-week high. A weaker dollar on Monday was bullish for metals prices. Also, the ongoing Israeli-Hamas conflict is supportive of safe-haven demand for precious metals. Silver prices found support from Monday’s slightly stronger-than-expected German Q3 GDP report, a supportive factor for industrial metals demand. A negative factor was Monday’s stock rally that curbed 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 here.
