The dollar index (DXY00) Wednesday rose by +1.04% and posted a 2-year high. The dollar rallied Wednesday after the FOMC signaled only 50 bp of interest rate cuts next year, down from a September projection of 100 bp of rate cuts. The dollar also moved higher after the FOMC raised its US 2024 GDP and core PCE price estimates and lowered its US unemployment rate forecast. Hawkish comments from Fed Chair Powell pushed the dollar to its high Wednesday when he said we need a restrictive monetary policy to reach our inflation goal. Wednesday’s US housing news was mixed for the dollar, but a record Q3 current account deficit was bearish for the dollar.
US Nov housing starts unexpectedly fell -1.8% m/m to 1.289 million, weaker than expectations of an increase to 1.345 million. However, Nov building permits, a proxy for future construction, rose +6.1% m/m to a 9-month high of 1.505 million, stronger than expectations of 1.430 million.
The US Q3 current account deficit was a record -$310.9 billion, wider than expectations of -$287.1 billion.
As expected, the FOMC cut the fed funds target range by -25 bp to 4.24%-4.50% and said risks to labor and inflation goals are roughly in balance.
The Fed's dot plot of interest rate projections shows the year-end 2025 median fed funds rate at 3.875%, up from a Sep projection of 3.375%, implying only two 25 bp rate cuts next year.
The FOMC raised its 2024 US GDP estimate to 2.5% from 2.0% in Sep and its 2025 GDP forecast to 2.1% from 2.0%. The FOMC cut its 2024 US unemployment rate forecast to 4.2% from 4.4% in Sep and lowered its 2025 unemployment rate forecast to 4.3% from 4.4%. The FOMC raised its 2024 core PCE forecast to 2.8% from 2.6% in Sep and its 2025 core PCE forecast to 2.5% from 2.2%.
Fed Chair Powell said we still have some work to do on inflation and need a restrictive monetary policy to reach our inflation goal.
The markets are discounting the chances at 6% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Wednesday fell by -1.20% and posted a -1/2 week low. The dollar’s surge to a 2-year high Wednesday weighed on the euro. Wednesday’s Eurozone economic news was mixed for the euro. Eurozone Nov CPI was revised lower, and Eurozone Oct construction output posted its largest increase in 21 months.
Eurozone Nov CPI was revised lower to +2.2% y/y from the previously reported +2.3% y/y. Nov core CPI remained unchanged at +2.7% y/y.
Eurozone Oct construction output rose +1.0% m/m, the largest increase in 21 months.
Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its next meeting on January 30 and a 14% chance for a -50 bp rate cut at that meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.74%. The yen fell to a 3-week low against the dollar on Wednesday. Soaring T-note yields on Wednesday undercut the yen along with the FOMC’s projections of less monetary easing next year. Japanese trade news was mixed for the yen on strength in Japanese exports but unexpected weakness in imports. The yen is also under pressure from expectations that the BOJ will refrain from raising interest rates at Thursday’s policy meeting.
Japanese trade news was mixed. Japan Nov exports rose +3.8% y/y, stronger than expectations of +2.5% y/y. Japan Nov imports unexpectedly fell -3.8% y/y, weaker than expectations of +0.8% y/y and the biggest decline in 8 months.
February gold (GCG25) Wednesday closed down -8.70 (-0.33%), and March silver (SIH25) closed down -0.191 (-0.59%). Precious metals posted moderate losses on Wednesday on a stronger dollar. Also, higher global bond yields on Wednesday were negative for precious metals. Gold prices fell by over -$35 an ounce in post-market trading Wednesday afternoon when the FOMC signaled fewer interest rate cuts next year.
Precious metals have safe-haven support from geopolitical risks after the recent collapse of the Syrian government and the escalation of hostilities in the Ukraine-Russia conflict. Silver prices also found support Wednesday on global economic news that showed US Nov building permits rose more than expected to a 9-month high, and Eurozone Oct construction output posted its largest increase in 21 months, supportive factors for industrial metals demand.
