Dollar Supported by Weak Stocks and Higher T-Note Yields

The dollar index (DXY00) Wednesday rose by +0.47%.  Higher T-note yields Wednesday and weakness in stocks supported moderate gains in the dollar.  Also, weakness in EUR/USD benefitted the dollar on dovish comments from ECB Vice President Guindos, who said he expects the ECB to continue lowering interest rates. Hawkish comments Wednesday from Fed Governor Bowman were bullish for the dollar when she said the Fed should move cautiously on further rate cuts because progress in reducing inflation has slowed.

The dollar has risen sharply over the past two weeks to a 1-year high last week due to President-elect Trump’s plans to raise tariffs and concerns his fiscal agenda will boost inflation and deter the Fed from cutting interest rates.

Fed Governor Bowman said, "I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the endpoint while recognizing that we have not yet achieved our inflation goal and closely watching the evolution of the labor market." 

Fed Governor Cook said, "It likely will be appropriate to move the policy rate toward a more neutral stance over time," but the "magnitude and timing" of reductions will depend on incoming data and the economic outlook.

The markets are discounting the chances at 52% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Wednesday fell by -0.55%.  The euro retreated Wednesday due to the strength of the dollar.  Also, dovish comments from ECB Vice President Guindos weighed on the euro when he said he expects the ECB to keep lowering interest rates. 

Signs of wage pressures in the Eurozone are hawkish for ECB policy and supportive for the euro after the ECB reported that Q3 Eurozone negotiated pay increased by the most since the euro’s inception, a hawkish factor for ECB policy. 

ECB Vice President Guindos said, "My impression is that the ECB will continue reducing the restriction of its monetary-policy stance over the next months and quarters."

The ECB reported Eurozone Q3 negotiated pay rose +5.4% y/y, the largest increase since the euro was introduced in 1999.

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) Wednesday rose by +0.48%.  The yen was under pressure Wednesday from higher T-note yields. Also, a slight easing of Ukraine-Russian tensions curbed safe-haven demand for the yen after Reuters reported that Russian President Putin is willing to talk with US President-elect Trump about a cease-fire deal in Ukraine.  Wednesday’s upward revision to Japan Oct machine tool orders and stronger-than-expected Japanese trade news for Oct supported the yen.

Japan Oct machine tool orders were revised upward by +0.1 to 9.4% y/y from the previously reported +9.3% y/y.

Japanese trade news was better than expected as Japan Oct exports rose +3.1% y/y, stronger than expectations of +1.0% y/y.  Also, Oct imports unexpectedly rose +0.4% y/y versus expectations of a -1.9% y/y decline.

December gold (GCZ24) Wednesday closed up +20.70 (+0.79%), and December silver (SIZ24) closed down -0.257 (-0.32%).  Precious metals settled mixed on Wednesday, with gold climbing to a 1-week high.  Demand for gold as a store of value increased Wednesday based on dovish comments from ECB Vice President Guindos, who said he expects the ECB to keep cutting interest rates. Also, demand for gold as a hedge against inflation increased Wednesday after UK Oct consumer prices rose more than expected.  In addition, escalating tensions in the Ukraine-Russia conflict boosted safe-haven demand for precious metals after Ukraine fired British cruise missiles at military targets inside Russia for the first time. 

A bearish factor for precious metals on Wednesday was a stronger dollar.  Also, higher global bond yields on Wednesday were negative for precious metals.  In addition, Ukraine-Russia tensions eased slightly Wednesday, which curbed some safe-haven demand for precious metals after Reuters reported that Russian President Putin is willing to talk with US President-elect Trump about a cease-fire deal in Ukraine.  Finally, the ECB Wednesday reported a record increase in Eurozone Q3 negotiated pay, a sign of wage pressures that are a hawkish factor for ECB policy.