The dollar index (DXY00) on Tuesday fell by -0.37%. Lower T-note yields Tuesday weighed on the dollar. Also, hawkish ECB comments Tuesday supported the euro and weighed on the dollar. In addition, the strength in stocks on Tuesday reduced the liquidity demand for the dollar.
Tuesday’s U.S. housing news was mixed for the dollar. On the positive side, Nov housing starts unexpectedly rose +14.8% m/m to a 6-month high of 1.56 million, stronger than expectations of a decline to 1.36 million. Conversely, Nov building permits, a proxy for future construction, fell -2.5% m/m to a 4-month low of 1.460 million, weaker than expectations of a decline to 1.465 million.
Fed comments on Tuesday were mixed for the dollar. On the dovish side, Richmond Fed President Barkin suggested the Fed would cut interest rates if recent progress on inflation continues, saying, "If you're going to assume that inflation comes down nicely, of course, the Fed would respond appropriately." On the hawkish side, Atlanta Fed President Bostic pushed back on speculation the Fed will soon cut interest rates when he said, "Inflation is going to come down relatively slowly in the next six months, which means there's not going to be urgency for the Fed to pull off its restrictive stance."
The markets are discounting the chances for a -25 bp rate cut at 10% for the next FOMC meeting on Jan 30-31 and at 83% for the following meeting on March 19-20.
EUR/USD (^EURUSD) on Tuesday rose by +0.47%. The euro rallied Tuesday after a couple of ECB policymakers, Kazaks and Simkus, pushed back on speculation that the ECB will cut interest rates as soon as Q1 of next year. A weaker dollar Tuesday also benefited the euro.
ECB Governing Council member Kazaks said the ECB needs to keep interest rates at current levels "for some time" to ensure wage growth slows down and new risks for inflation don't arise as "it is too early to declare victory over inflation and therefore not the time to cut interest rates."
ECB Governing Council member Simkus said while there was a positive surprise on Eurozone consumer prices in November, the medium-term outlook hasn't changed much, so "the expectations of early and fast interest rate cuts may be too optimistic."
Swaps tied to ECB meeting dates are discounting the chances for a -25 bp rate hike at 6% for the January 25 ECB meeting and 45% for the March 7 meeting.
USD/JPY (^USDJPY) on Tuesday rose by +0.78%. The yen on Tuesday retreated against the dollar after the BOJ voted unanimously to maintain negative interest rates and said it will “patiently” continue with monetary easing. The yen weakened further Tuesday after BOJ Governor Ueda said the chances are low that the BOJ will announce a rate hike next month.
The BOJ voted 9-0 to maintain its policy rate at -0.1% and to keep the 10-year JGB yield target at about 0% and said it would patiently continue with monetary easing with extremely high uncertainties around economic activity and prices.
BOJ Governor Ueda said the side effects of negative rates aren't decisive enough to require an immediate policy adjustment, and the chances are low that the BOJ will announce a rate hike next month.
February gold (GCG4) Tuesday closed +11.60 (+0.57%), and Mar silver (SIH24) closed -0.214 (+0.89%). Gold and silver prices Tuesday closed moderately higher. Dollar weakness on Tuesday was bullish for metals prices. Also, lower global bond yields Tuesday were supportive of precious metals. Gold garnered support as a store of value Tuesday after the BOJ maintained negative interest rates and said it would patiently continue with monetary easing. On the negative side, the rally in stocks curbed the safe-haven demand for precious metals.
Central bank comments on Tuesday were mixed for precious metals. On the positive side, Richmond Fed President Barkin suggested the Fed would cut interest rates if recent progress on inflation continues. Conversely, Atlanta Fed President Bostic said he doesn’t see urgency for the Fed to cut interest rates. Also, ECB Governing Council members Simkus and Kazaks pushed back on speculation that the ECB would cut interest rates as soon as Q1 of next year.
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.
