Quick Summary
- The U.S. Dollar Index (DXY00) experienced a slight decline of 0.12% as markets awaited the Federal Open Market Committee (FOMC) meeting results.
- Potential dovish outcomes, including hints of further rate cuts and an end to quantitative tightening, pressured the dollar.
- Economic data such as the Richmond Fed and consumer confidence reports provided some support, but the ongoing U.S. government shutdown remained a concern.
- A tentative U.S.-China trade agreement emerged over the weekend, reducing safe-haven demand for the dollar.
- Gold prices fell to a three-week low, while silver prices saw a slight increase.
Dollar Faces Pressure Ahead of FOMC Meeting
The U.S. Dollar Index (DXY00) traded defensively on Tuesday, registering a slight decrease of 0.12%. This subdued movement occurred as traders awaited the conclusion of the two-day Federal Open Market Committee (FOMC) meeting, which was expected to conclude on Wednesday. Anticipation centered on potential dovish signals from the committee, including indications of further interest rate cuts and a possible cessation of quantitative tightening measures. These expectations contributed to the dollar’s downward pressure.
Adding to the dollar’s headwinds was a decline in the 10-year Treasury note yield, which dropped by 0.4 basis points. This yield movement often correlates inversely with the dollar’s strength, as lower yields can make dollar-denominated assets less attractive to investors.
The ongoing U.S. government shutdown continued to weigh on the dollar. Analysts suggested that a prolonged shutdown could negatively impact the U.S. economy, potentially increasing the likelihood of the Federal Reserve implementing further interest rate cuts to stimulate growth.
💡 On a more positive note for the dollar, the Richmond Fed manufacturing index and U.S. consumer confidence reports released on Tuesday exceeded market expectations, providing some degree of support.
Market Expectations for FOMC Decisions
Market participants widely anticipated that the FOMC, at the conclusion of its meeting, would announce a 25 basis point rate cut, bringing the target federal funds rate range to 3.75%-4.00%. Beyond this expected move, futures markets were pricing in a 90% chance of another 25 basis point cut at the subsequent FOMC meeting on December 9-10. Looking further ahead, traders were discounting a total of 115 basis points in rate cuts by the end of 2026, which would bring the effective federal funds rate down from its current 4.10% to 2.95%.
A significant aspect of the upcoming FOMC meeting was the absence of a scheduled release of a Summary of Economic Projections, which typically includes the Federal Reserve’s dot plot indicating future rate policy. This means that while Fed Chair Powell was expected to hold his customary post-meeting press conference, there would be no updated projections from other Fed officials regarding their outlook on interest rates.
Furthermore, the markets were also closely watching for an announcement regarding the potential end of the Federal Reserve’s quantitative tightening program. This process involves allowing the central bank’s balance sheet to shrink. A halt to quantitative tightening would generally be viewed as supportive for both stock and bond markets, as it would signal an end to the draining of liquidity from the U.S. financial system.
Economic Data and Trade Developments
In terms of economic data, the August FHFA U.S. house price index showed a stronger-than-expected increase of 0.4% month-over-month, surpassing the anticipated 0.1% decline. Similarly, the S&P CoreLogic Case-Shiller U.S. 20-city house price index rose by 0.19% month-over-month and 1.58% year-over-year, outperforming expectations of a 0.10% monthly drop and 1.30% annual growth.
The October Richmond Fed manufacturing index also demonstrated resilience, rising 13 points to -4. This figure was notably better than the market’s expectation of a 5-point increase to -12.
Consumer sentiment provided a mixed picture. The Conference Board’s U.S. consumer confidence index for October dipped slightly by 1.0 point to 94.6, down from a revised 95.6. However, this figure still came in stronger than the expected reading of 93.4.
💡 Over the weekend, U.S. and Chinese negotiators reportedly reached a tentative trade agreement, diminishing safe-haven demand for the dollar. This agreement, expected to be finalized at an upcoming summit, signaled a potential de-escalation of trade tensions. Key aspects included the U.S. likely withdrawing its threat of imposing 100% tariffs on Chinese imports, China agreeing not to restrict rare earth metal exports for at least a year, and both sides making progress on issues like shipping fees and the export of fentanyl precursors.
Currency Market Movements
The EUR/USD pair experienced a modest increase of 0.15%, finding support from the dollar’s weakness. The euro continued to benefit from a divergence in central bank policies, as the European Central Bank (ECB) was perceived to have concluded its rate-cut cycle, while the Federal Reserve was expected to implement further reductions.
The USD/JPY pair saw a decline of 0.60% on Tuesday. The Japanese yen was bolstered by increased confidence surrounding Japan’s political and trade standing, particularly after positive interactions between U.S. and Japanese leadership. Additionally, comments from a Japanese minister indicating close monitoring of the yen’s weakness suggested potential for policy adjustments to support the currency.
The Bank of Japan was widely expected to maintain its policy rate at 0.50% at its upcoming meeting. Swap rate data indicated only a 14% probability of a rate hike.
Precious Metals Performance
December COMEX gold futures closed down by $36.60 (-0.91%), settling at $4,047.10 per ounce. In contrast, December COMEX silver futures finished higher, gaining $0.550 (+1.18%) to close at $48.845 per ounce.
Gold prices fell to a three-week low on Tuesday, influenced by persistent long liquidation following a significant rally in the preceding two months. The preliminary U.S.-China trade agreement also contributed to a reduction in safe-haven demand, impacting precious metals.
📌 Despite the short-term decline, precious metals retain underlying safe-haven appeal due to factors such as the ongoing U.S. government shutdown, trade uncertainty, geopolitical risks, central bank purchases, and concerns about the Federal Reserve’s independence. Recent softer U.S. economic data also supports the outlook for continued Fed rate cuts, which is typically bullish for precious metals.
📊 However, precious metals faced selling pressure stemming from outflows from exchange-traded funds (ETFs) and substantial long liquidation. Holdings in gold ETFs have fallen from recent highs, and silver ETF holdings have also decreased.
Final Thoughts
The dollar’s performance was shaped by conflicting forces, with upcoming FOMC decisions and trade developments playing significant roles. While anticipated Fed rate cuts and a shutdown weighed on the currency, positive economic data offered some support. Precious metals experienced a mixed session, with gold declining on profit-taking and reduced safe-haven demand, while silver managed a slight gain.