Key Takeaways
- The US dollar index (DXY) reached a 2.5-month high, supported by hawkish remarks from Federal Reserve officials opposing rate cuts.
- Stronger-than-expected US economic data, like the Chicago PMI, also contributed to the dollar’s rise, though stock market gains limited its advance.
- Hawkish comments from Fed officials including Chairman Powell, and Presidents Schmid, Logan, and Hammack suggest a cautious approach to interest rate reductions.
- The EUR/USD pair fell to a 2.5-month low pressured by dollar strength, despite some positive Eurozone economic indicators.
- Precious metals, including gold and silver, declined as the dollar strengthened and safe-haven demand eased due to improving US equity markets and easing US-China trade tensions.
Dollar Index Reaches New High Amidst Hawkish Fed Commentary
The US dollar index (DXY) experienced a notable increase of +0.27% on Friday, marking a fresh 2.5-month high. This upward movement was significantly influenced by hawkish statements from Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack. These officials voiced reasons for opposing Federal Reserve interest rate cuts, reinforcing a stronger dollar sentiment.
Additionally, the dollar found support following the release of the October MNI Chicago PMI, which surpassed expectations. The dollar also benefited from carryover strength stemming from Wednesday’s comments by Fed Chair Powell. Powell indicated that a rate cut at the December FOMC meeting was not a foregone conclusion. However, gains in the dollar were somewhat tempered by a rally in the stock market on Friday, which reduced the typical demand for the dollar as a safe haven.
ℹ️ The ongoing US government shutdown continues to exert pressure on the dollar. Prolonged shutdowns increase the likelihood of negative impacts on the US economy, which could, in turn, pressure the Federal Reserve into considering interest rate cuts.
Economic Data and Fed Officials’ Stance on Interest Rates
The October MNI Chicago PMI reported a figure of 43.8, an increase of +3.2 points from the previous period, exceeding the forecast of 42.3. This data point provided further support for the dollar.
Kansas City Fed President Jeff Schmid elaborated on his dissent, stating he voted against the Fed’s 25 basis point interest rate cut on Wednesday. He cited reasons such as a relatively balanced labor market, continued economic momentum, and inflation that remains elevated.
Dallas Fed President Lorie Logan echoed a similar sentiment, indicating she did not see a need for a rate cut that week. She added that further rate reductions would be difficult to justify in December unless there is clear evidence of inflation falling faster than anticipated or a more rapid cooling of the labor market.
Cleveland Fed President Beth Hammack also expressed a preference for maintaining the status quo, stating she would have preferred to hold interest rates steady at the FOMC meeting. Hammack emphasized the necessity of sustaining a degree of restriction to help get inflation back down to target.
Market Expectations for Fed Rate Cuts
Market participants are currently pricing in a 63% probability that the FOMC will implement a 25 basis point reduction in the fed funds target range at the upcoming meeting on December 9-10. Looking further ahead, markets are anticipating a total rate cut of approximately 82 basis points by the end of 2026, bringing the effective federal funds rate down from its current level of 3.88% to around 3.06%.
Europares Against Dollar Weakness
The EUR/USD currency pair experienced a significant decline on Friday, falling to a 2.5-month low and closing down by -0.33%. The strengthening US dollar exerted considerable downward pressure on the euro.
Despite the euro’s weakness against the dollar, Friday’s economic data from the Eurozone offered some support. The October core CPI for the Eurozone and September retail sales for Germany both came in stronger than expected.
📍 A key factor supporting the euro is the perceived divergence in central bank policy. The European Central Bank (ECB) is widely seen as having concluded its cycle of interest rate cuts, while the Federal Reserve is expected to enact further reductions, potentially by at least another percentage point by the end of 2024.
Eurozone and German Economic Indicators
In the Eurozone, the October CPI eased slightly to +2.1% year-over-year, down from +2.2% in September, meeting expectations. The core CPI remained unchanged from September at +2.4% year-over-year, surpassing the expected +2.3%.
In Germany, September retail sales showed modest growth, rising by +0.2% month-over-month and +2.8% year-over-year. These figures were slightly above expectations of +0.2% month-over-month and +2.7% year-over-year.
📊 Current swap market pricing indicates a low 4% chance of a 25 basis point rate cut by the ECB at its policy meeting on December 18.
USD/JPY Consolidates Amid Mixed Japanese Data
The USD/JPY currency pair saw a modest decrease on Friday, falling by -0.03%. The Japanese yen experienced slight gains, consolidating just above the 8.5-month low it reached against the dollar on Thursday.
Stronger-than-expected Japanese economic data released on Friday for September industrial production and October Tokyo CPI were viewed as hawkish for Bank of Japan (BOJ) policy, providing support for the yen. However, a weaker-than-expected report on Japan’s September retail sales limited the yen’s gains.
Japanese Economic Data Highlights
Japan’s September industrial production increased by +2.2% month-over-month, surpassing the forecast of +1.5% and marking the largest monthly increase in seven months.
Japan’s September retail sales rose by +0.3% month-over-month, falling short of the expected +0.8% increase.
The October Tokyo CPI, a key inflation indicator, rose by +2.8% year-over-year, exceeding expectations of +2.4%. The October Tokyo CPI excluding fresh food and energy also increased to +2.8% year-over-year, stronger than the anticipated +2.6%.
Precious Metals Decline on Dollar Strength and Fed Signals
December COMEX gold futures closed down -19.40 (-0.48%) on Friday, while December COMEX silver futures settled lower by -0.456 (-0.94%).
Precious metals surrendered earlier gains on Friday, ultimately settling lower. Silver, in particular, fell from a one-week high. The sharp rise in the US dollar index to a 2.5-month high triggered significant long liquidation in precious metals markets.
⚡ Hawkish comments from Federal Reserve officials on Friday also weighed on precious metals prices. Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack all presented arguments against further Fed rate cuts, dampening investor enthusiasm for gold and silver.
Furthermore, the easing of US-China trade tensions has contributed to a reduction in safe-haven demand for precious metals. Silver prices also faced pressure following signs of weakness in Chinese industrial metals demand, as indicated by the October manufacturing PMI, which fell more than expected and signaled the steepest pace of contraction in six months.
Gold’s Initial Rise and Underlying Support for Precious Metals
Gold prices initially moved higher on Friday, benefiting from carryover support from Thursday. This support was driven by indications of increased central bank gold buying, following a World Gold Council report revealing that global central banks purchased 220 metric tons of gold in Q3, a 28% increase from Q2.
💡 Precious metals continue to find underlying support from their safe-haven status amidst several ongoing concerns, including the prolonged US government shutdown, uncertainty surrounding US tariffs, geopolitical risks, substantial central bank purchases, and political pressures on the Federal Reserve’s independence.
Moreover, recent weaker-than-expected US economic data has bolstered the outlook for the Federal Reserve to maintain lower interest rates, which is generally considered a bullish factor for precious metals.
Pressures on Precious Metals from Profit-Taking and Equity Rallies
Since reaching record highs earlier this month, precious metals prices have faced pressure from long liquidation. Additionally, the recent rally in the S&P 500 to new record highs has diminished safe-haven demand for precious metals, leading to heavy long liquidation and outflows from precious metals ETFs.
Holdings in gold ETFs have decreased from their 3-year high recorded last Tuesday, and silver ETF holdings have dropped from their 3.25-year high from the same day.
China’s Manufacturing Sector Contracts
The China October manufacturing PMI registered a figure of 49.0, down 0.8 points from the previous period. This reading was weaker than the expected 49.6 and indicated the sharpest pace of contraction in six months.
Expert Summary
The US dollar strengthened significantly, reaching a 2.5-month high due to hawkish Federal Reserve commentary and supportive economic data, despite ongoing government shutdown concerns. This dollar strength weighed on the euro and precious metals, though underlying safe-haven demand and central bank buying provide some support for gold and silver.