Dollar Rebounds from Early Losses on Safe-Haven Demand from Geopolitical Risks

The dollar index (DXY00) today is up by +0.10%.  The dollar recovered from early losses and moved higher on increased safe-haven demand on reports that Ukraine carried out its first strike on a border region in Russia using Western-supplied missiles and after Russian President Putin approved an updated nuclear doctrine expanding the conditions for using atomic weapons.

The dollar today initially moved lower on weaker-than-expected US housing news on Oct housing starts and building permits.  Also, lower T-note yields today have weakened the dollar’s interest rate differentials.  In addition, strength in the yen weighed on the dollar as USD/JPY fell to a 1-week low today on jawboning from Japan’s Finance Minister. 

US Oct housing starts fell -3.1% m/m to 1.311 million, weaker than expectations of 1.334 million. Oct building permits, a proxy for future construction, unexpectedly fell -0.6% m/m to 1.416 million versus expectations of an increase to 1.435 million.

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 down by -0.24%.  The euro is under pressure today from dovish ECB comments. ECB Governing Council member Panetta said that restrictive monetary conditions are no longer necessary for the ECB, and ECB Governing Council member Muller said the ECB is likely to reduce interest rates by -25 bp next month.  The escalation of hostilities between Ukraine and Russia also undercut the euro after Ukraine launched a missile attack inside Russia for the first time using Western-supplied missiles.

ECB Governing Council member Panetta said, "Restrictive monetary conditions are no longer necessary, and the ECB needs to normalize its monetary-policy stance and move to neutral or even expansionary territory, if necessary."

ECB Governing Council member Muller said the ECB will likely reduce interest rates by a quarter-point at its December 18-19 meeting.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 19% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) today is down by -0.43%.  The yen rallied to a 1-week high against the dollar today based on comments from Japanese Finance Minister Kato, who said there’s no change in the government’s stance of taking appropriate measures against excessive currency movements.  Increased safe-haven demand for the yen pushed the yen even higher today on the escalation of the Ukraine-Russian conflict.  Lower T-note yields today are also bullish for the yen.

December gold (GCZ24) today is up +16.10 (+0.62%), and December silver (SIZ24) is up +0.031 (+0.103%).  Precious metals today are moderately higher, with gold and silver posting 1-week highs.  Escalation of the Ukraine-Russian conflict has boosted safe-haven demand for precious metals after Ukraine forces reportedly carried out their first missile strikes on a border region in Russia using Wester-supplied missiles.  Also, Russian President Putin approved an updated nuclear doctrine that expands the conditions for Russia to use atomic weapons, including in response to a conventional attack on its soil.  In addition, dovish ECB comments today boosted demand for gold as a store of value when ECB Governing Council member Panetta said that restrictive monetary conditions by the ECB are no longer necessary and ECB Governing Council member Muller said the ECB is likely to reduce interest rates by -25 bp next month. 

Precious metals fell back from their best levels today after the dollar recovered from early losses and turned higher.  Also, gains in silver were limited after the US Oct housing starts, and building permits fell more than expected, a negative factor for the demand for industrial metals.