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Dollar Drops on Expectations the Fed is Done Raising Interest Rates

Barchart - Fri Nov 17, 2:35PM CST

The dollar index (DXY00) on Friday fell by -0.42% and posted a 2-1/2 month low. The dollar Friday fell moderately and remains under pressure as this week’s better-than-expected U.S. inflation news and weekly jobs data that point to a slowing labor market have bolstered speculation the Fed is down raising interest rates.  The dollar recovered from its worst levels after Friday’s news showed that U.S Oct housing starts and Oct building permits unexpectedly rose.

Friday’s U.S. housing news was better than expected and bullish for the dollar.  Oct housing starts unexpectedly rose +1.9% m/m to 1.372 million, stronger than expectations for a decline to 1.350 million.  Also, Oct building permits, a proxy for future construction, unexpectedly rose +1.1% to 1.487 million, stronger than expectations of a decline to 1.450 million.

Fed comments Friday were mixed for the dollar.  On the negative side, comments from San Francisco Fed President Daly suggest she favors maintaining a pause in Fed rate hikes when she said, "When uncertainty is high, and risk to our objectives are more balanced, we need to practice gradualism."  Conversely, Boston Fed President Collins said, "In order to get back down to a 2% inflation rate in a reasonable amount of time, we need to be patient and resolute, and I wouldn't take additional monetary firming off the table."

The markets are discounting a 0% chance for a +25 bp rate hike at the next FOMC meeting on Dec 12-13 FOMC and a 0% chance for that +25 bp rate hike at the following FOMC meeting on Jan 30-31, 2024.  The markets are then discounting a 28% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and a 76% chance for that same -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting. 

EUR/USD (^EURUSD) on Friday rose by +0.48% and climbed to a 2-1/2 month high.  A weaker dollar Friday was supportive of the euro.  Also, hawkish ECB comments Friday gave EUR/USD a boost after ECB Governing Council members Nagel and Holzmann voiced opposition to any easing of ECB monetary policy in the medium term.

ECB Governing Council member and Bundesbank President Nagel said borrowing costs "have to remain at a high level for a sufficient period," and an ECB rate cut anytime soon is "highly improbable."

ECB Governing Council member Holzmann said it would be "too soon" for the ECB to begin cutting interest rates in Q2 of next year, and market expectations for a rate reduction are premature.

USD/JPY (^USDJPY) on Friday fell by -0.71%.  The yen on Friday rallied for a second day and posted a 2-1/2 week high against the dollar.  Short-covering is boosting the yen as it recovers further from Monday’s 1-year low.  Gains in the yen accelerated in overnight trade after the 10-year T-note yields dropped to a 1-3/4 month low. 

December gold (GCZ3) Friday closed down -2.60 (-0.13%), and Dec silver (SIZ23) closed down -0.081 (-0.34%).  Precious metals prices Friday closed moderately lower, with gold falling back from a 1-1/2 week high and silver retreating from a 2-1/2 month high.  Precious metals gave up overnight gains and turned lower after T-note yields recovered from early losses and moved higher after Friday’s news showed U.S. Oct housing starts and building permits unexpectedly increased, hawkish factors for Fed policy.  Also, hawkish central bank comments undercut gold prices when ECB Governing Council members Nagel and Holzmann voiced their opposition to easing ECB monetary policy and after Boston Fed President Collins said she “wouldn't take additional monetary firming off the table."  Friday’s slide in the dollar index to a 2-1/2 month low limited losses in metals. 

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On 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. For more information please view the Barchart Disclosure Policy here.

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