Dollar Slips as Hawkish ECB Comments Boost the Euro

The dollar index (DXY00) today is down -0.18%.  Strength in the euro today is weighing on the dollar as EUR/USD rose on hawkish comments from ECB Governing Council member Nagel, who said central banks may have to raise interest rates should international tensions intensify and lead to more significant inflationary pressures. 

Today’s unexpected increase in the US Nov NAHB housing market index to a 7-month high supported the dollar.  Also, higher T-note yields today have strengthened the dollar’s interest rate differentials and are limiting losses in the dollar. 

The US Nov NAHB housing market index unexpectedly rose +3 to a 7-month high of 46, stronger than expectations of a decline to 42.

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

EUR/USD (^EURUSD) today is up by +0.28%.  The euro today is moderately higher based on hawkish comments from ECB Governing Council member Nagel, who warned the ECB that it may be forced to raise interest rates should rising international trade tensions boost inflationary pressures. 

ECB Governing Council member and Bundesbank President Nagel said if international tensions should intensify, this could lead to more significant inflationary pressures or increased volatility in consumer-price growth, and central banks might have to react with higher interest rates.

ECB Governing Council member Stournaras warned that economic activity could weaken, and the Eurozone could fall into recession if the US imposed additional tariffs.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 18% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) today is up by +0.43%.  The yen weakened after today’s economic news showed that Japan's Sep core machine orders unexpectedly declined.  The yen added to its losses after BOJ Governor Ueda avoided giving a hint on whether the BOJ will raise interest rates next month.  Higher T-note yields today are also undercutting the yen. 

Japan Sep core machine orders unexpectedly fell -0.7% m/m, weaker than expectations of +1.5% m/m.

BOJ Governor avoided giving a clear signal that the BOJ will raise interest rates at the December 18-19 meeting when he said, "The actual timing of the adjustments of interest rates will continue to depend on developments in economic activity and prices as well as financial conditions going forward."

December gold (GCZ24) today is up +44.30 (+1.72%), and December silver (SIZ24) is up +0.838 (+2.75%).  Precious metals are posting moderate gains today due to a weaker dollar. Also, demand for gold remains strong as Republicans now control the House and Senate, making it easier for the Trump administration to push through its lower tax, higher tariff, and looser regulation policies that could revive inflation.  Gold prices found support today after Goldman Sachs recommended investors “go for gold” and projected gold could rally to $3,000 an ounce by the end of next year.  In addition, the ongoing geopolitical risks are boosting safe-haven demand for precious metals, with ongoing hostilities in the Middle East and a Bloomberg report that said North Korea may deploy as many as 100,000 troops to aid Russia’s war on Ukraine.  Silver added to its gains today after the US Nov NAHB housing market index unexpectedly rose to a 7-month high, a supportive factor for industrial metals demand.

Higher global bond yields today are bearish for precious metals.  Also, hawkish comments from ECB Governing Council member and Bundesbank President Nagel were negative for precious metals when he warned global central banks might be forced to raise interest rates if international trade tension revived inflationary pressures.