Dollar Falls Slightly as T-Note Yields Drop and Stocks Recover

The dollar index (DXY00) Tuesday fell by -0.07%.  The dollar on Tuesday posted modest losses on the weaker-than-expected US Oct housing starts and building permits reports.  Also, lower T-note yields Tuesday weakened the dollar’s interest rate differentials and weighed on the dollar.  In addition, Tuesday’s stock recovery curbed liquidity demand for the dollar. 

Losses in the dollar were limited as geopolitical risks boosted safe-haven demand for the dollar after Ukraine carried out its first strike on a border region in Russia using Western-supplied missiles.  Also, Russian President Putin approved an updated nuclear doctrine expanding the conditions for using atomic weapons.

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 59% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Tuesday fell by -0.04%.  The euro was under modest pressure Tuesday 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 18% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Tuesday rose by +0.01%.  The yen on Tuesday fell back from a 1-week high against the dollar and finished little changed after a stock recovery from early sharp losses to higher on the day reduced safe-haven demand for the yen.

The yen on Tuesday initially moved higher based on comments from Japanese Finance Minister Kato, who said there’s no change in the government’s stance on taking appropriate measures against excessive currency movements.  Increased safe-haven demand for the yen also supported the yen on the escalation of the Ukraine-Russian conflict.  In addition, lower T-note yields Tuesday were also bullish for the yen.

December gold (GCZ24) Tuesday closed up +16.40 (+0.63%), and December silver (SIZ24) closed up +0.038 (+0.12%).  Precious metals posted moderate gains on Tuesday, with gold and silver climbing to 1-week highs.  The weakness in the dollar Tuesday was bullish for precious metals.  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 Tuesday 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 Tuesday after stocks 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.