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Dollar Falls and Gold Soars to Record High on Dovish Fed Comments

Barchart - Fri Dec 1, 2023

The dollar index (DXY00) on Friday fell by -0.23%.  On Friday, the dollar relinquished early gains and posted moderate losses on weak U.S. economic news and dovish Fed-speak.  The Nov U.S. ISM manufacturing index contracted more than expected, a dovish factor for Fed policy.  Losses in the dollar accelerated after Fed Chair Powell and Chicago Fed President Goolsbee signaled their support for the Fed to leave interest rates steady at the upcoming Dec 12-13 FOMC meeting.

Friday’s U.S. economic news was mixed for the dollar.  On the bearish side, the Nov ISM manufacturing index was unchanged at 46.7, weaker than expectations of an increase to 47.8 and the 13th consecutive month of contraction in manufacturing activity.  Conversely, Oct construction spending rose +0.6% m/m, stronger than expectations of +0.3% m/m.

Dovish Fed comments on Friday weighed on the dollar.  Fed Chair Powell signaled the Fed will leave interest rates steady at the Dec 12-13 FOMC meeting when he said, "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when policy might ease."  Also, Chicago Fed President Goolsbee said, "There's no evidence that inflation has stalled at 3%, and I think it's still on track to get to 2%."

The markets are discounting a 1% 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 78% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and are fully discounting (a 151% chance) for that same -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting. 

EUR/USD (^EURUSD) on Friday fell by -0.10% and posted a 2-week low. On Friday, the euro gave up an early advance and retreated on dovish comments from ECB Governing Council member Villeroy de Galhau, who said, "Barring any shock, ECB rate hikes are over." The euro Friday initially moved higher after the Eurozone Nov S&P manufacturing PMI was revised upward. 

ECB Governing Council member Villeroy de Galhau said, "Barring any shock, ECB rate hikes are over," and we can look at rate cuts when the time comes in 2024. 

The Eurozone Nov S&P manufacturing PMI was revised upward by +0.4 to 44.2 from the initially reported 43.8.

Swaps tied to ECB meeting dates are pricing in an 81% chance that the ECB will reduce its benchmark rate by -25 bp at the March 7 meeting and are more than pricing in (+183%) that -25 bp rate cut at the April 11 ECB meeting.

USD/JPY (^USDJPY) on Friday fell by -0.93%.  On Friday, the yen rallied to a 2-1/2 month high against the dollar.  A slump in T-note yields Friday boosted the yen, as did dovish comments from Fed Chair Powell and Chicago Fed President Goolsbee, who signaled their support for the Fed to pause its rate hikes.  The yen also found support from Friday’s Japanese economic news that showed the Oct jobless rate unexpectedly fell, a sign of labor market strength, and after the Japan Nov Jibun Bank manufacturing PMI was revised upward. 

Friday's economic news was mainly better than expected and supported the yen.  The Nov Jibun Bank manufacturing PMI was revised upward by +0.2 to 48.3 from the previously reported 48.1.  Also, the  Oct jobless rate unexpectedly fell -.1 to 2.5%, showing a stronger labor market than expectations of no change at 2.6%.  Conversely, Q3 capital spending ex-software rose +1.7% y/y, weaker than expectations of +3.4% y/y.

February gold (GCG4) Friday closed up +32.50 (+1.58%), and Mar silver (SIH24) closed up +0.197 (+0.77%).  Precious metals prices on Friday posted moderate gains, with gold soaring to a record high and silver climbing to a 6-3/4 month high.  A weaker dollar on Friday underpinned precious metals prices.  Precious metals also found support on Friday from a decline in global bond yields.  Metals extended their gains Friday on dovish central bank comments that sparked demand for precious metals as a store of value.  Fed Chair Powell signaled the Fed will leave interest rates steady at the Dec 12-13 FOMC meeting, and Chicago Fed President Goolsbee signaled his support for steady Fed policy when he said inflation is still on track to get to 2%. In addition, ECB Governing Council member Villeroy de Galhau said, "Barring any shock, ECB rate hikes are over."



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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.