Dollar Retreats on Euro Strength and Lower T-Note Yields

The dollar index (DXY00) on Monday fell by -0.42%.  Strength in the euro Monday weighed 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.  The dollar extended its losses Monday after T-note yields gave up an early advance and turned lower, weakening the dollar’s interest rate differentials. 

Monday’s unexpected increase in the US Nov NAHB housing market index to a 7-month high supported the dollar.  Also, weakness in the Japanese yen boosted 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) Monday rose by +0.51%.  The euro Monday posted moderate gains 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.  The euro added to its gains Monday as US and German bond yields diverged, with T-note yields falling and bund yields climbing, which benefitted the euro’s interest rate differentials.

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 17% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Monday rose by +0.20%.  The yen weakened after Monday’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.  The yen recovered from its worst levels Monday after T-note yields gave up an early advance and turned lower, a positive factor for 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) Monday closed up +44.50 (+1.73%), and December silver (SIZ24) closed up +0.792 (+2.60%).  Precious metals rallied on Monday 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, heightened 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 Monday after the US Nov NAHB housing market index unexpectedly rose to a 7-month high, a supportive factor for industrial metals demand.

Strength in stocks on Monday reduced some safe-haven demand 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 tensions revived inflationary pressures.