Dollar Supported by Geopolitical Risks and Higher T-Note Yields

The dollar index (DXY00) Wednesday rose by +0.48% and posted a 2-1/2 week high. The dollar rose on safe-haven support from escalating Middle East tensions.  Gains in the dollar accelerated after bond yields jumped on the stronger-than-expected US Sep ADP employment report, a hawkish factor for Fed policy.  Also, the yen tumbled Wednesday to the dollar’s benefit after Prime Minster Ishiba ruled out a BOJ interest rate hike for now. 

The US Sep ADP employment change rose +143,000, showing a stronger labor market than expectations of +125,000.

The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 38% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Wednesday fell by -0.25% and posted a fresh 2-1/2 week low.  Wednesday’s stronger dollar weighed on the euro.  Also, dovish comments Wednesday from ECB Vice President Guindos and ECB Governing Council member Kazaks pressured the euro as they signaled support for an ECB interest rate cut at the October 17 policy meeting.

ECB Vice President Guindos said the economic revival in the Eurozone is likely to gain momentum, though risks are still "tilted to the downside."

ECB Governing Council member Kazaks said, "Recent data clearly point in the direction of an interest rate cut as the risks to the Eurozone economy have become more pronounced and the risks of still sticky inflation and too-weak growth are increasingly balanced with some tilt towards weak growth."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for the October 17 meeting and at 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Wednesday rose by +1.92%.  The yen fell sharply Wednesday on dovish comments from Japanese government officials.  Japanese Prime Minister Ishiba ruled out a BOJ interest rate increase for now, and BOJ Governor Ueda signaled that the BOJ was in no hurry to raise interest rates.  Losses in the yen accelerated Wednesday after T-note yields rose on the stronger-than-expected US Sep ADP employment report.

The Japan Sep consumer confidence index rose +0.2 to a 5-month high of 36.9, weaker than expectations of 37.0.

Comments from BOJ Governor Ueda suggest the BOJ is in no hurry to raise interest rates when he said, "The outlook of the global economy is uncertain, and financial markets remain unstable.  We will watch these developments with an extremely high sense of urgency for the time being."

Japanese Prime Minister Ishiba said, "We are not in an environment now to raise interest rates again."

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 2% for the October 30-31 meeting and at +19% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) Wednesday closed down -20.60 (-0.77%), and December silver (SIZ24) closed up +0.178 (+0.56%).  Precious metals Wednesday settled mixed.  Gold prices retreated Wednesday after the dollar index rallied to a 2-1/2 week high.  Also, higher global bond yields on Wednesday were negative for precious metals.  In addition, gold prices fell on Wednesday’s stronger-than-expected US Sep ADP employment report, which was hawkish for Fed policy and reduced the chances for another 50 bp rate cut by the Fed. 

Precious metals still have safe-haven support from the escalation of Middle East tensions after Iran launched a missile attack at Israel and Israeli Prime Minister Netanyahu vowed to retaliate, saying Iran “made a big mistake” and “will pay.” Precious metals also garnered support Wednesday as a store of value from dovish central bank comments after ECB Governing Council member Kazaks said, "Recent data clearly point in the direction of an interest rate cut,” and BOJ Governor Ueda signaled the BOJ is in no hurry to raise interest rates when he said, "The outlook of the global economy is uncertain and financial markets remain unstable.” 

More Precious Metal News from Barchart

• Dollar Gains on Middle East Tensions and US Labor Market Strength
• Silver Surge: 3 ETFs to Capitalize on the Precious Metal's Rise
• Dollar Climbs on Safe-Haven Demand from Middle East Tensions
• Dollar Strengthens on Middle East Tensions and a Weak Euro

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.