Dollar Retreats Ahead of FOMC Meeting

The dollar index (DXY00) today is down by -0.71%.  The dollar today fell back from Wednesday’s 4-month high on profit-taking ahead of the FOMC meeting results later this afternoon when the Fed is expected to cut the fed funds target range by -25 bp.  Also, today’s US economic news weighed on the dollar after Q1 nonfarm productivity rose less than expected and Q1 unit labor costs rose more than expected.  On the positive side, US weekly initial unemployment claims rose less than expected, a sign of labor market strength that is hawkish for Fed policy.

US weekly initial unemployment claims rose +3,000 to 221,000, showing a stronger labor market than expectations of 222,000.

US Q3 nonfarm productivity rose +2.2%, weaker than expectations of +2.5%.  Q1 unit labor costs rose +1.9%, stronger than expectations of +1.0%.

The markets are discounting the chances at 100% for a -25 bp rate cut at today’s FOMC meeting and at 0% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) today is up by +0.79%.  Today's weakness in the dollar sparked short covering in the euro following Wednesday’s rout when the euro fell to a 4-1/4 month low.  The euro also garnered support from today’s economic news that showed Eurozone Sep retail sales rose more than expected, and German trade data for Sep was better than expected.  Gains in the euro accelerated today on upbeat comments from ECB Governing Council member Knot, who said he's optimistic about the prospects for the Eurozone economy.  On the negative side, German Sep industrial production fell more than expected.

Eurozone Sep retail sales rose +0.5% m/m, stronger than expectations of +0.4% m/m, and Aug was revised upward to +1.1% m/m from the previously reported +0.2% m/m.

German trade data was better than expected as Sep exports fell -1.7% m/m, stronger than expectations of -2.4% m/m.  Also, Sep imports rose +2.1% m/m, stronger than expectations of +0.6% m/m. 

German Sep industrial production fell -2.5% m/m, weaker than expectations of -1.0% m/m.

ECB Governing Council member Knot said he's optimistic about the prospects for the Eurozone economy as inflation moderates and borrowing costs fall.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 17% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) today is down by -0.94%.  Short covering pushed the yen higher today on comments from Japan's chief currency official who warned that authorities will take appropriate action against excessive forex moves after the yen tumbled to a 3-1/4 month low against the dollar on Wednesday.  Today’s decline in T-note yields is also boosting the yen.  Today’s news that showed Japanese wages rising less than expected was dovish for BOJ policy and bearish for the yen.

Japan Sep labor cash earnings rose +2.8% y/y, weaker than expectations of +3.0% y/y.  Also, Sep real cash earnings unexpectedly fell -0.1% y/y, weaker than expectations of +0.1% y/y.

Japan's chief currency official Mimura said he is seeing one-sided, sudden moves currently in the currency market, and authorities will take appropriate action against excessive forex moves.

December gold (GCZ24) today is up +25.70 (+0.96%), and December silver (SIZ24) is up +0.549 (+1.75%).  Precious metals today are moderately higher as they recover some of Wednesday’s sharp decline.  Today’s weaker dollar is supportive of metals.  Also, today’s action by the BOE to cut interest rates by 25 bp and expectations for the Fed to cut interest rates by -25 bp after today’s FOMC meeting support demand for precious metals as a store of value.  In addition, the ongoing hostilities in the Middle East continue to boost safe-haven demand for precious metals.  Silver garnered support from today’s economic news that showed China’s Oct exports rose by the most in 2-1/4 years, a positive factor for economic growth and industrial metals demand.

Today’s rally in the S&P 500 to a new record high has reduced some safe-haven demand for precious metals.  Also weighing on silver prices is speculation that President-elect Trump’s high tariff policies will slow global trade and economic growth, thus undercutting the demand for industrial metals. 

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• Dollar Weakens Ahead of US Election Results

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.