Dollar Rallies and Gold Slumps on President-Elect Trump’s Policies

The dollar index (DXY00) Monday rose by +0.50% and posted a 4-1/4 month high. Hawkish comments from Minneapolis Fed President Kashkari boosted the dollar when he said US economic strength and higher productivity could prompt the Fed to cut rates less than expected. Also, the dollar is extending 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. 

On Saturday, Minneapolis Fed President Kashkari said a strong US economy and higher productivity growth could lead policymakers to reduce interest rates less than previously expected over the coming months.

The markets are discounting the chances at 65% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Monday fell by -0.60% and posted a 6-1/2 month low. Dollar strength Monday weighed on the euro.  Also, dovish ECB comments Monday undercut the euro.  ECB Governing Council member Holzmann said he sees "no reason" for the ECB not to cut interest rates in December.  Also, ECB Governing Council member Stournaras said “interest rates could end up close to 2% around next September." In addition, political turmoil in Germany is negative for the euro, with German Chancellor Scholz calling for a snap election in January after he sacked Free Democratic Party Finance Minister Linder last Wednesday, forfeiting the alliance’s majority in the lower house of parliament.

ECB Governing Council member Holzmann said he sees "no reason" for the ECB not to cut interest rates at its December policy meeting, but a rate cut is not guaranteed.

ECB Governing Council member Stournaras said, "Now that inflation is coming down, we've started to lower interest rates, which looks like we're going to continue lower and could end up close to 2% around next September."

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 21% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Monday rose by +0.72%.  The yen was under pressure on Monday’s economic news that showed the Japan Oct eco-watchers survey outlook fell more than expected. The yen was also undercut Monday after the commentary of the Oct 30-31 BOJ meeting, which showed policymakers discussed the need for caution when raising interest rates.

The Japan Oct eco-watchers survey outlook fell -1.4 to 48.3, weaker than expectations of 49.2.

In the Oct 30-31 BOJ meeting summary, a BOJ policymaker said the BOJ can keep interest rates unchanged for now as it seeks to conduct monetary policy more cautiously, given heightened uncertainties at home and abroad.

December gold (GCZ24) Monday closed down -77.10 (-2.86%), and December silver (SIZ24) closed down -0.836 (-2.66%).  Precious metals fell sharply on Monday, with gold and silver posting 1-month lows.  Monday’s rally in the dollar index to a 4-1/4 month high was bearish for metals prices.  Also, Monday’s rally in the S&P 500 to a new record high reduced safe-haven demand for precious metals. In addition, comments from Minneapolis Fed President Kashkari undercut gold prices when he said that US economic strength and higher productivity could keep the Fed from aggressively cutting interest rates.  Silver prices are also weighed down by speculation President-elect Trump’s high tariff policies will slow global trade and economic growth, thus undercutting the demand for industrial metals.   

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.  Also, the ongoing hostilities in the Middle East continue to boost safe-haven demand for precious metals.

More Forex News from Barchart

• Stocks Rally on Optimism in President-Elect Trump’s Policies
• Dollar Supported by President-Elect Trump’s Policies
• S&P 500 and Dow Jones Industrials at Record Highs as the Post-Election Rally Continues
• What Were Markets Doing the Monday Morning After?

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.