Quick Summary
- The US Dollar Index (DXY) reached a three-week high, supported by rising Treasury yields and hawkish commentary from Fed Chair Powell.
- Reduced US-China trade tensions offer a positive outlook for economic growth.
- The ongoing US government shutdown presents a downside risk to the economy and could influence future Fed rate decisions.
- EUR/USD declined to a two-week low, but found support from a stronger-than-expected Eurozone GDP report and a more optimistic outlook from the ECB.
- USD/JPY fell to an eight-month low as the Bank of Japan maintained its interest rates and signaled a cautious approach to policy changes.
- Gold and silver prices recovered, boosted by central bank buying and signs of economic strength in the Eurozone, despite initial pressure from a stronger dollar.
Dollar Index Strength Amidst Mixed Economic Signals
The US Dollar Index (DXY) has climbed to a three-week peak, reflecting a +0.19% increase. This upward movement is bolstered by rising Treasury note yields, which have reached a two-and-a-half-week high. The dollar also benefits from carryover support from Wednesday, following hawkish remarks by Federal Reserve Chair Powell, who emphasized that a rate cut at the December FOMC meeting is not a foregone conclusion.
Positive developments in US-China trade relations are also providing a supportive backdrop for economic growth prospects. An agreement between President Trump and President Xi Jinping to extend a tariff truce, roll back export controls, and reduce other trade barriers could foster a more stable global trade environment.
US Government Shutdown and Fed Rate Expectations
Despite these supportive factors, the dollar remains under pressure due to the ongoing US government shutdown. The longer the shutdown persists, the greater the potential negative impact on the US economy, which in turn could increase the likelihood of the Federal Reserve needing to cut interest rates.
Market participants are currently pricing in a 72% 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. Furthermore, the markets are anticipating an overall rate cut of 82 basis points by the end of 2026, bringing the effective federal funds rate down from its current 3.88% to 3.06%.
Euro Resilience Amidst Central Bank Divergence
The EUR/USD pair has fallen to a two-week low, down by -0.15%, primarily due to the dollar’s current strength. However, the euro managed to recover from its lowest point after the European Central Bank (ECB) maintained its interest rates unchanged following its policy meeting. The release of a stronger-than-expected Eurozone Q3 GDP report and the October German CPI data provided a hawkish impetus for ECB policy, proving beneficial for the euro.
Adding to the euro’s strength were upbeat comments from ECB President Lagarde, who indicated that downside risks to economic growth have diminished. This sentiment contrasts with the Federal Reserve’s expected rate-cut cycle. Central bank divergence is seen as a key factor supporting the euro, with the ECB widely believed to have concluded its rate-cut cycle, while the Fed is anticipated to lower rates by at least another percentage point by the end of 2026.
In detail, Eurozone Q3 GDP showed a +0.2% quarter-on-quarter and +1.3% year-on-year increase, surpassing expectations of +0.1% and +1.2% respectively. The Eurozone October economic sentiment indicator rose by 1.2 to 96.8, a 2.5-year high, exceeding the expected 96.0.
German October CPI (EU harmonized) reported a +0.3% month-on-month and +2.3% year-on-year rise, which was stronger than the anticipated +0.2% and +2.2%. As anticipated, the ECB held its deposit facility rate steady at 2.00%.
ECB President Lagarde noted that the EU trade deal with the US, the ceasefire in the Middle East, and progress in China-US relations have mitigated downside risks to growth. Market sentiment indicates a mere 5% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.
Japanese Yen Weakens Against Dollar Amidst BOJ Stance
The USD/JPY pair is currently trading up by +0.94%, with the yen depreciating significantly against the dollar, reaching an eight-and-a-half-month low. This weakness in the yen follows the Bank of Japan’s (BOJ) decision to keep its interest rates unchanged at its recent policy meeting. Higher Treasury note yields are also contributing to the downward pressure on the yen.
Losses in the yen accelerated after BOJ Governor Ueda stated that the central bank is not at risk of falling behind the curve, despite its decision to maintain current interest rates. As expected, the BOJ kept its target policy rate at 0.50%. BOJ Governor Ueda explained that rates were held steady to allow for observation of more data concerning domestic wage-setting behaviors, while acknowledging the continued uncertainty in overseas economies.
The BOJ did revise its 2025 Japan GDP forecast upward to +0.7% from +0.6%, but maintained its 2025 core CPI forecast at 2.7%.
Precious Metals Rebound Amidst Central Bank Buying and Economic Cues
December COMEX gold futures (GCZ25) are up +20.10 (+0.50%), and December COMEX silver futures (SIZ25) have risen +0.592 (+1.24%). Both precious metals have recovered from earlier losses, pushing higher in today’s trading.
Stronger central bank purchases of gold are providing underlying support for prices. The World Gold Council reported that global central banks acquired 220 metric tons of gold in the third quarter, a 28% increase from the second quarter, bringing total central bank gold purchases year-to-date through September to 634 metric tons.
Signs of economic strength, particularly the faster-than-expected expansion in Eurozone Q3 GDP, are supportive of demand for industrial metals like silver. Additionally, the easing of US-China trade tensions following the agreement on a tariff truce may further stimulate economic growth and consequently boost demand for industrial metals.
Initially, precious metals experienced downward pressure from a stronger dollar, which reached a three-week high. Higher global bond yields also presented a negative factor for precious metals. The easing of US-China trade tensions has also reduced the safe-haven demand typically associated with gold and silver.
Furthermore, precious metals are experiencing some negative carryover from comments made by Fed Chair Powell on Wednesday, who noted that a further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion.
However, precious metals retain underlying safe-haven support stemming from the ongoing US government shutdown, uncertainties surrounding US tariffs, geopolitical risks, robust central bank buying, and political pressures on the Fed’s independence. Recent weaker-than-expected US economic data has also bolstered expectations for the Fed to maintain interest rate cuts, a factor that is generally bullish for precious metals.
Since reaching record highs earlier this month, precious metals have faced headwinds from long liquidation pressures. The recent rally in the S&P 500 to new record highs has also diminished safe-haven demand for precious metals, triggering significant long liquidation and outflows from ETFs. Holdings in gold ETFs have declined from a three-year high recorded last Tuesday, and silver ETF holdings have dropped from a 3.25-year high evident on the same day.
Final Thoughts
The US dollar’s ascent to a three-week high is influenced by Treasury yields and Fed commentary, while US-China trade de-escalation offers economic optimism. The ongoing US government shutdown remains a key risk factor, potentially impacting future Federal Reserve policy. The divergence in central bank expectations between the Federal Reserve and the European Central Bank continues to shape currency markets, with the yen weakening notably against the dollar following the Bank of Japan’s decision to hold rates steady.