Quick Summary
- The U.S. Dollar Index (DXY) reached a three-month high on Tuesday, driven by equity market weakness and carry-over support from Fed Chair Powell’s stance on future rate cuts.
- Bearish factors for the dollar include lower T-note yields and weaker-than-expected U.S. vehicle sales data.
- The ongoing U.S. government shutdown poses a risk to the economy and could influence the Federal Reserve’s decision on interest rates.
- EUR/USD fell to a three-month low, impacted by dollar strength and dovish comments from an ECB Governing Council member regarding Eurozone growth prospects.
- USD/JPY saw a recovery from an 8.5-month low, with potential Japanese intervention and rising Japanese government bond yields providing support.
- Gold and silver prices retreated due to dollar strength and concerns over industrial metal demand, though underlying safe-haven support remains.
Dollar Strengthens Amid Market Uncertainty
The U.S. Dollar Index (DXY) saw a notable rise of +0.37% on Tuesday, achieving a three-month high. This upward movement was largely fueled by a slump in equity markets, which increased demand for the dollar as a liquidity haven. The dollar also benefited from comments made by Fed Chair Powell the previous week, signaling that a December rate cut is not a certainty.
Economic Indicators and Dollar Sentiment
Despite the dollar’s gains, certain factors introduced bearish pressure. These included a decline in T-note yields on Tuesday and a less robust-than-anticipated report on U.S. October total vehicle sales from Wards Intelligence.
💡The ongoing U.S. government shutdown continues to weigh on the dollar. The longer the shutdown persists, the greater the potential negative impact on the U.S. economy, which could lead the Federal Reserve to consider interest rate cuts.
Markets are currently pricing in a substantial 69% probability that the Federal Open Market Committee (FOMC) will implement a 25 basis point reduction in the fed funds target range at its upcoming meeting on December 9-10.
📍 A key bearish indicator for the dollar was the U.S. October Wards total vehicle sales report, which slowed to 15.32 million units. This figure fell short of the expected 15.50 million and marked the lowest sales volume in 14 months.
Euro Under Pressure Amidst Conflicting Signals
The EUR/USD pair experienced a decline of -0.36% on Tuesday, reaching a three-month low. The primary driver behind the euro’s weakness was the strengthening U.S. dollar. Additionally, remarks from ECB Governing Council member Stournaras contributed to the downward pressure, as he indicated that the Eurozone’s growth prospects are subject to multiple downside risks.
📊 Divergence in central bank policy continues to offer some support to the euro. The European Central Bank (ECB) is largely perceived as having concluded its rate-cut cycle, in contrast to the Federal Reserve, which is anticipated to implement several more rate cuts by the end of 2026.
Comments from ECB Governing Council member Rehn on Tuesday offered a neutral outlook for the euro. He described Eurozone growth as sluggish but resilient, with inflation risks being two-sided. Rehn highlighted upward risks from goods and food prices, and potential supply disruptions, while downward risks stemmed from cheaper energy, a stronger euro, and easing wage pressures. He emphasized the importance of maintaining full flexibility in decision-making and avoiding commitment to a specific interest rate path.
ECB Governing Council member Stournaras reiterated concerns about Eurozone growth prospects, citing multiple downside risks. These include uncertainties surrounding trade policy, prolonged international geopolitical tensions, and domestic political uncertainty in France.
⚡ Swaps are currently reflecting a low 6% chance of a -25 basis point rate cut by the ECB at its policy meeting on December 18.
Yen Recovers on Intervention Fears and Yield Support
The USD/JPY pair saw a decline of -0.36% on Tuesday. The Japanese yen managed to recover from an 8.5-month low, moving higher as short-covering emerged. Signs that Japanese authorities might be nearing currency market intervention to support the yen contributed to this recovery. Japanese Finance Minister Satsuki Katayama’s statement, I’m seeing one-sided and rapid moves in the currency market, fueled these expectations.
Additionally, higher Japanese government bond yields have improved the yen’s interest rate differentials. The 10-year JGB yield climbed to a three-week high of 1.691% on Tuesday. The decrease in T-note yields on the same day also provided support to the yen.
📉 The yen has recently faced weakness due to Japanese political uncertainty and a delay in anticipated Bank of Japan (BOJ) rate hikes. However, markets are now discounting a 50% chance of a BOJ rate hike at its upcoming policy meeting on December 19.
Precious Metals Retreat Amid Dollar Strength
December COMEX gold prices closed down -53.50 (-1.33%) on Tuesday, while December COMEX silver prices fell -0.758 (-1.33%).
US Dollar’s Ascent Drives Precious Metals Down
Gold and silver prices retreated on Tuesday, primarily influenced by the strengthening U.S. dollar, which reached a three-month high. The decline in silver prices was also exacerbated by weak demand for industrial metals, a sentiment reinforced by the drop in U.S. October total vehicle sales to a 14-month low.
📌 Furthermore, comments from ECB Governing Council member Stournaras, highlighting multiple downside risks to Eurozone growth, acted as a headwind for silver prices.
Despite the recent pullback, precious metals continue to find underlying support from their safe-haven status. This is buoyed by the ongoing U.S. government shutdown, uncertainties surrounding U.S. tariffs, geopolitical risks, central bank gold purchases, and political pressures on the Federal Reserve’s independence. Gold prices also received residual support from the World Gold Council’s report last Thursday, revealing that global central banks acquired 220 metric tons of gold in Q3, a 28% increase from the previous quarter.
📉 Since reaching record highs in mid-October, precious metals have faced selling pressure from long liquidation. Holdings in gold and silver ETFs have recently decreased after peaking at three-year highs on October 21.
Expert Summary
Tuesday saw the U.S. dollar index surge to a three-month high, driven by equity market declines and the narrative around potential Fed rate policy. While economic data like vehicle sales and the ongoing government shutdown present headwinds, market expectations remain focused on the FOMC’s next move. The euro weakened against the dollar, influenced by concerns over Eurozone growth, while the yen showed resilience amid potential intervention signals and yield support.