Dollar Rallies as T-Note Yields Turn Higher

The dollar index (DXY00) Thursday finished up +0.30% and posted a 13-month high. The dollar Thursday recovered from early losses and moved higher as a rebound in T-note yields strengthened the dollar’s interest rate differentials after T-note yields recovered from early losses and moved higher.  Thursday’s US economic news was mixed for the dollar.

The dollar on Thursday initially moved lower based on dovish comments from New York Fed President Williams and Chicago Fed President Goolsbee, who said they expect the Fed to keep cutting interest rates until rates are closer to neutral levels. 

US weekly initial unemployment claims unexpectedly fell -6,000 to a 6-1/2 month low of 213,000, showing a stronger labor market than expectations of an increase to 220,000.

The US Nov Philadelphia Fed business outlook survey fell -15.8 to -5.5, weaker than expectations of 8.0.

US Oct leading indicators fell -0.4% m/m, weaker than expectations of -0.3% m/m.

US Oct existing home sales rose +3.4% m/m to 3.96 million, stronger than expectations of 3.95 million.

New York Fed President Williams said US economic growth has been "very good" and "the disinflationary process will continue."  He added that the cooling labor market and lower inflation show that monetary policy is restrictive today, and he expects "it will be appropriate over time to bring the fed-funds rate down closer to more normal or neutral levels."

Chicago Fed President Goolsbee said he has confidence inflation is easing toward the Fed's objective and "if we look out over the next year or so, it feels to me like rates will end up a fair bit lower than where they are today."

The markets are discounting the chances at 56% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Thursday fell by -0.60% and posted a 13-month low. The euro was under pressure Thursday based on dovish comments from ECB Governing Council member Stournaras, who said the ECB should cut interest rates at every meeting until the deposit rate reaches 2%.  Escalation of the Ukraine-Russia conflict is also weighing on the euro after Ukraine said Russia launched long-range missiles into the city of Dnipro.  In addition, an unexpected decline in Eurozone Oct consumer confidence to a 5-month low is bearish for the euro.  A supportive factor for the euro was hawkish comments from ECB Governing Council member Holzmann who said ECB monetary policy must remain restrictive on price risks.

Eurozone Oct new car registrations rose +1.1% y/y to 866,000 units, the biggest increase in 4 months.

The Eurozone Nov consumer confidence index unexpectedly fell -1.2 to a 5-month low of -13.7, weaker than expectations of an increase to -12.4.

ECB Governing Council member Stournaras said, "As inflation develops now and as the real economy develops now, I think the ECB should cut rates at each meeting until we get to what we call the neutral rate, which is about 2% according to estimates." 

ECB Governing Council member Holzmann said ECB monetary policy must remain restrictive because "it's not yet guaranteed that inflation will sustainably reach 2%."

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 17% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Thursday fell by -0.61%.  Short covering pushed the yen higher against the dollar Thursday after BOJ Governor Ueda said he is “closely watching” forex impacts on the economy and inflation.  Also, higher Japanese bond yields strengthened the yen’s interest rate differentials as the 10-year JGB 10-year bond yield rose to a 4-1/2 month high Thursday of 1.100%. In addition, the escalation of Ukraine-Russian tensions boosted safe-haven demand for the yen after Russia launched an intercontinental ballistic missile against Ukraine.  The yen fell back from its best levels Thursday when T-note yields rebounded from an early decline and turned higher.

BOJ Governor Ueda said that he is “closely watching” the impact of forex on the economy and inflation and that it's not possible to predict the outcome of the BOJ's December meeting.

December gold (GCZ24) Thursday closed up +23.20 (+0.87%), and December silver (SIZ24) closed down -0.062 (-0.29%).  Precious metals settled mixed on Thursday, with gold posting a 1-1/2 week high.  Escalating tensions in the Ukraine-Russia conflict boosted safe-haven demand for precious metals after Ukraine said Russia launched long-range missiles into the city of Dnipro.  Also, demand for gold as a store of value increased Thursday based on dovish central bank comments. ECB Governing Council member Stournaras said the ECB should cut interest rates at each policy meeting until the deposit rate falls to 2%, while New York Fed President Williams and Chicago Fed President Goolsbee said they expect the Fed to keep cutting rates until they are closer to neutral levels.

Thursday’s rally in the dollar index to a 13-month high was bearish for metals prices.  Also, signs of strength in the US labor market may delay Fed rate cuts and are bearish for precious metals after US weekly initial unemployment claims unexpectedly fell to a 6-1/2 month low.  Silver prices remain under pressure due to concerns that the Trump administration’s pro-tariff policies will curb global economic growth and reduce demand for industrial metals.