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Dollar Falls on Lower Bond Yields and Dovish FOMC Minutes

Barchart - Wed Nov 23, 2:56PM CST
Dollars and Wallets - Shutterstock_795558181

The dollar index (DXY00) on Wednesday fell sharply by -1.06%.   A fall in T-note yields Wednesday weakened the dollar’s interest rate differentials and was bearish for the dollar.  Also, weakness in U.S. the unemployment claims and U.S. PMI reports was dovish for Fed policy and bearish for the dollar.  The dollar extended its losses on the dovish minutes of the Nov 1-2 FOMC meeting.   

Wednesday’s U.S. economic news was mixed for the dollar.  On the bearish side, weekly initial unemployment claims rose +17,000 to a 3-1/4 month high of 240,000, showing a weaker labor market than expectations of 225,000.  Also, the Nov S&P Global manufacturing PMI fell -2.8 to 2-1/2 year low of 47.6, weaker than expectations of 50.0.  In addition, the Nov S&P Global U.S. services PMI unexpectedly fell -1.7 to 46.1, weaker than expectations of an increase to 48.0.

On the bullish side for the dollar, Oct capital goods new orders nondefense ex-aircraft, a proxy for capital spending, rose +0.7% m/m, stronger than expectations of unchanged. Also, Oct new home sales unexpectedly rose +7.5% m/m to 632,000, stronger than expectations of a decline to 570,000.  In addition, the University of Michigan U.S. Nov consumer sentiment index rose +2.1 to 56.8, stronger than expectations of 55.0.

The minutes of the Nov 1-2 FOMC meeting were dovish for Fed policy and bearish for the dollar.  The minutes showed policymakers favored a slowing of interest rate increases as "a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate."

EUR/USD (^EURUSD) on Wednesday rose by +0.91%.  The euro Wednesday rallied moderately on better-than-expected Eurozone economic news.  The Eurozone Nov S&P Global manufacturing PMI and the Eurozone Nov S&P Global composite PMI rose unexpectedly.  However, on the euro’s bearish side was the comment from ECB Vice President Guindos, who said the Eurozone economy would likely contract in Q4-2022 and Q1-2023. 

Wednesday’s Eurozone economic news supported the euro after the Eurozone Nov S&P Global manufacturing PMI unexpectedly rose +0.9 to 47.3, stronger than expectations of a decline to 46.0.  Also, the Eurozone Nov S&P Global composite PMI unexpectedly rose +0.5 to 47.8, stronger than expectations of a decline to 47.0.

ECB Vice President Guindos said the Eurozone economy will likely contract in Q4 and Q1 of next year, and he favors a "passive" approach to QT.

USD/JPY (^USDJPY) on Tuesday fell -1.30%.  The yen Wednesday rallied on a sharp drop in T-note yields.  The yen also has support from recent Fed comments and Wednesday’s minutes of the Nov 1-2 FOMC meeting that solidified expectations for smaller Fed rate hikes.  Trading activity in the yen Wednesday was subdued, with Japanese markets closed for the Labor Thanksgiving holiday.

December gold (GCZ2) on Wednesday closed up +5.70 (+0.33%), and December silver (SIZ22) closed up +0.323 (+1.54%).  Precious metals Wednesday erased early losses and settled moderately higher.  A weaker dollar Wednesday was bullish for metals prices. Gold also found support Wednesday from lower global government bond yields.  Gold prices extended their gains by more than $7 an ounce from their Wednesday afternoon close on the dovish minutes of the Nov 1-2 FOMC meeting. Strength in stocks Wednesday reduced the safe-haven demand for gold.  In addition, gold prices continue to be undercut by fund liquidation as long positions in gold ETF’s dropped to a new 2-1/2 year low last Friday.

More Precious Metal News from BarchartOn the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.