The dollar index (DXY00) on Friday rose by +0.11%. The dollar on Friday recovered from early losses and posted modest gains on increased safe-haven demand after Reuters reported that a senior U.S. official said it expects some sort of retaliation from the Houthis for Thursday’s air attacks on Houthi targets in Yemen by the U.S. and its allies.
The dollar Friday initially moved lower after the U.S. Dec PPI report showed an easing of price pressures that knocked bond yields lower and boosted expectations for Fed rate cuts, bearish factors for the dollar.
U.S. Dec PPI final demand fell -0.1% m/m and rose +1.0% y/y, weaker than expectations of +0.1% m/m and +1.3% y/y. Dec PPI ex-food and energy eased to +1.8% y/y from +2.0% y/y in Nov, weaker than expectations of no change at +2.0% y/y and the smallest increase in 3 years.
The markets are discounting the chances for a -25 bp rate cut at 7% for the next FOMC meeting on Jan 30-31 and an 85% chance for that -25 bp rate cut for the following meeting on March 19-20.
EUR/USD (^EURUSD) on Friday fell by -0.17%. The euro on Friday gave up an early advance and turned lower as a recovery in the dollar sparked long liquidation in the euro. EUR/USD was also weighed down by dovish comments from ECB President Lagarde, who said that once the ECB’s 2% inflation goal comes into view, she’s “very confident interest rates will start to decline.” The euro Friday initially moved higher on positive economic news after French Nov consumer spending unexpectedly rose by the most in 5 months.
French Nov consumer spending unexpectedly rose +0.7% m/m, stronger than expectations of a -0.2% m/m decline and the biggest increase in 5 months.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 4% for its next meeting on January 25 and 43% for the following meeting on March 7.
USD/JPY (^USDJPY) on Friday fell by -0.27%. The yen Friday moved moderately higher as T-note yields fell. Also, Friday’s dovish U.S. Dec PPI report boosted expectations for Fed rate cuts that supported the yen. A bearish factor for the yen was a Bloomberg report on Friday that said BOJ officials are likely to discuss cutting their forecasts for economic growth and inflation ex-energy when they meet later this month. Also, Friday’s rally in the Nikkei Stock Index to a 34-year high curbed safe-haven demand for the yen.
The Japan Dec eco watchers survey outlook unexpectedly fell -0.3 to 49.1, weaker than expectations of an increase to 49.5.
February gold (GCG4) Friday closed +32.40 (+1.60%), and Mar silver (SIH24) closed +0.624 (+2.75%). Precious metals on Friday settled moderately higher. Friday’s Dec PPI report was bullish for precious metals, showing producer prices rising less than expected, bolstering the outlook for Fed rate cuts. In addition, an escalation of geopolitical risks in the Middle East has sparked safe-haven demand for precious metals after the U.S. and its allies launched joint air strikes against Houthi rebels in Yemen. Finally, an increase in inflation expectations boosted demand for gold as an inflation hedge after the 10-year breakeven inflation rate rose to a 6-week high of 2.283%.
Precious metals fell back from their best levels Friday on a rebound in the dollar after the dollar index recovered from early losses and moved higher. A bearish factor for gold is ongoing long liquidation after long gold holdings in ETFs fell to a 4-year low Thursday.
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.
