Dollar Weighed Down by Lower Bond Yields and Strength in Stocks

The dollar index (DXY00) Thursday fell by -0.71%.  The dollar on Thursday fell back from Wednesday’s 4-month high after the FOMC cut the fed funds target range by -25 bp.  Also, lower T-note yields Thursday weakened the dollar’s interest rate differentials. In addition, Thursday’s US economic news weighed on the dollar after Q1 nonfarm productivity rose less than expected and Q1 unit labor costs rose more than expected.

On the positive side, US weekly initial unemployment claims rose less than expected, a sign of labor market strength that is hawkish for Fed policy.  The dollar also found support from hawkish comments from Fed Chair Powell, who said core inflation is still "somewhat elevated."

US weekly initial unemployment claims rose +3,000 to 221,000, showing a stronger labor market than expectations of 222,000.

US Q3 nonfarm productivity rose +2.2%, weaker than expectations of +2.5%.  Q1 unit labor costs rose +1.9%, stronger than expectations of +1.0%.

The FOMC, as expected, lowered the fed funds target range by 25 bp to 4.50%-4.75% from 4.75%-5.00% and said risks to goals remain "roughly in balance."

Fed Chair Powell said that while inflation has moved closer to the Fed's goal, core inflation is still "somewhat elevated."  He added, "We don't think it's a good time to be doing a lot of forward guidance," and "we don't know what the timing or substance" of economic policy changes will be going forward.

The markets are discounting the chances at 67% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Thursday rose by +0.71%.  Thursday's weakness in the dollar sparked short covering in the euro following Wednesday’s rout when the euro fell to a 4-1/4 month low.  The euro also garnered support from Thursday’s news of better-than-expected Eurozone retail sales and German trade reports.  Gains in the euro accelerated Thursday on upbeat comments from ECB Governing Council member Knot, who said he's optimistic about the prospects for the Eurozone economy.  On the negative side, German Sep industrial production fell more than expected.

Eurozone Sep retail sales rose +0.5% m/m, stronger than expectations of +0.4% m/m, and Aug was revised upward to +1.1% m/m from the previously reported +0.2% m/m.

German trade data was better than expected as Sep exports fell -1.7% m/m, stronger than expectations of -2.4% m/m.  Also, Sep imports rose +2.1% m/m, stronger than expectations of +0.6% m/m. 

German Sep industrial production fell -2.5% m/m, weaker than expectations of -1.0% m/m.

ECB Governing Council member Knot said he's optimistic about the prospects for the Eurozone economy as inflation moderates and borrowing costs fall.

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 -1.20%.  Short covering pushed the yen higher Thursday, based on comments from Japan's chief currency official, who warned that authorities would take appropriate action against excessive forex moves after the yen tumbled to a 3-1/4 month low against the dollar on Wednesday.  Thursday’s decline in T-note yields also boosted the yen.  Thursday’s news that showed Japanese wages rising less than expected was dovish for BOJ policy and bearish for the yen.

Japan Sep labor cash earnings rose +2.8% y/y, weaker than expectations of +3.0% y/y.  Also, Sep real cash earnings unexpectedly fell -0.1% y/y, weaker than expectations of +0.1% y/y.

Japan's chief currency official Mimura said he is currently seeing one-sided, sudden moves in the currency market, and authorities will take appropriate action against excessive forex moves.

December gold (GCZ24) Thursday closed up +29.50 (+1.10%), and December silver (SIZ24) closed up +0.524 (+1.67%).  Precious metals settled moderately higher on Thursday as they recovered some of Wednesday’s sharp decline.  Thursday’s weaker dollar was supportive of metals.  Precious metals prices also found support from -25 bp rate cuts by the Bank of England and the Fed.  In addition, the ongoing hostilities in the Middle East continue to boost safe-haven demand for precious metals.  Silver garnered support from Thursday’s economic news that showed China’s Oct exports rose by the most in 2-1/4 years, a positive factor for economic growth and industrial metals demand.

Thursday’s rally in the S&P 500 to a new record high undercut safe-haven demand for precious metals.  Also, hawkish comments from Fed Chair Powell were bearish for gold when he said core inflation is still "somewhat elevated."  A bearish factor for silver prices is speculation that President-elect Trump’s high tariff policies will slow global trade and economic growth, thus undercutting the demand for industrial metals. 

More Precious Metal News from Barchart

• Dollar Retreats Ahead of FOMC Meeting
• Dollar Retreats Ahead of FOMC Meeting
• The Election of Trump Boosts the Dollar and Hammers Gold Prices
• Dollar Surges and Gold Plunges as Trump Wins US Presidential Election

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.