Dollar Supported by Rising T-Note Yields

The dollar index (DXY00) Tuesday rose by +0.47% and posted a 4-1/4 month high. Higher T-note yields Tuesday strengthened the dollar’s interest rate differentials and boosted the dollar.  Comments Tuesday from Richmond Fed President Barkin supported the dollar when he said the US economy looks "pretty good." The dollar also extended last week’s post-election rally on speculation that T-note yields will increase as inflation increases due to President-elect Trump’s pro-tariff policies. 

Richmond Fed President Barkin said the US economy looks "pretty good," and the Fed is positioned to respond however the economy evolves.

Minneapolis Fed President Kashkari said only inflation could derail a Fed rate cut in December, and "if we saw inflation surprises to the upside between now and then, that might give us pause."

The markets are discounting the chances at 62% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Tuesday fell by -0.38% and posted a 6-3/4 month low. Dollar strength Tuesday weighed on the euro.  Also, an unexpected decline in the German Nov ZEW survey on economic growth expectations was bearish for the euro.  In addition, dovish comments from ECB Governing Council member Rehn were bearish for the euro when he said a December interest rate cut by the ECB was likely with disinflation on track.  Finally, political turmoil in Germany is negative for the euro as German Chancellor Scholz's Social Democrats and opposition lawmakers agreed to hold an early election on February 23. 

The German Nov ZEW survey expectations of economic growth unexpectedly fell -3.7 to 7.4 versus expectations of an increase to 13.2.

ECB Governing Council member Rehn said disinflation in the Eurozone is "well on track," and the growth outlook "seems to be weakening," and "that strengthens the case for an ECB rate cut in December."

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 23% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Tuesday rose by +0.62%.  The yen on Tuesday tumbled to a 3-1/2 month low against the dollar.  Higher T-note yields Tuesday undercut the yen.  The yen extended its week long decline on speculation that President-elect Trump’s high tariff policies will boost the dollar and weigh on the yen.  A supportive factor for the yen was Tuesday’s Japanese Oct machine tool orders report that showed orders rose by the most in 4 months.

Japan Oct machine tool orders rose +9.3% y/y, the largest increase in 4 months.

December gold (GCZ24) Tuesday closed down -11.40 (-0.44%), and December silver (SIZ24) closed up +0.146 (+0.48%).  Precious metals on Tuesday settled mixed, with gold dropping to a 1-3/4 month low.  Tuesday’s rally in the dollar index to a 4-1/4 month high was bearish for metals prices. Also, higher global bond yields Tuesday weighed on precious metals.  Silver prices garnered support Tuesday after Japanese Oct machine tool orders posted their largest increase in 4 months, a supportive factor for industrial metals demand.

On the positive side for precious metals, dovish comments Tuesday from ECB Governing Council member Rehn boosted demand for gold as a store of value when he said a December interest rate cut by the ECB was on track.  Also, demand for gold as a hedge against inflation may remain strong in the near term on the likelihood that Republicans gain control of the House and Senate, which will make it easier for the Trump administration to push through its lower tax, higher tariff, and looser regulation policies, which could revive inflation.  In addition, the ongoing hostilities in the Middle East continue to boost safe-haven demand for precious metals.

More Forex News from Barchart

• Stocks Slightly Lower as Indexes Consolidate Recent Rally
• Dollar Strengthens on Higher T-Note Yields
• Stock Indexes Slightly Higher as They Consolidate Below Record Highs
• Has the "Trump Trade" Killed King Gold?

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.