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Dollar Tracks T-Note Yields Higher

Barchart - Mon Dec 4, 2023

The dollar index (DXY00) on Monday rose by +0.42% and posted a 1-week high. The dollar on Monday followed a jump in T-note yields on concern that the markets are perhaps being overly optimistic about the chances for Fed rate cuts early next year.  Also, the fall in EUR/USD Monday to a 2-1/2 week low supported the dollar.  In addition, the weakness in stocks on Monday boosted the liquidity demand for the dollar. 

Monday’s U.S. economic news was bearish for the dollar after Oct factory orders fell -3.6% m/m, weaker than expectations of -3.0% m/m and the biggest decline in 3-1/2 years.

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 65% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and are more than discounting (131%) that -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting. 

EUR/USD (^EURUSD) on Monday fell by -0.49% and dropped to a 2-1/2 week low.  The euro gave up an early advance and retreated on dovish comments from ECB Governing Council member Centeno, who warned that labor market fallout from too much monetary tightening could be precipitous when the economy turns. Weaker-than-expected German trade news for October also undercut the euro, as did the smaller-than-expected increase in the Eurozone Dec Sentix investor confidence index.

ECB Governing Council member Centeno warned that labor market fallout from too much monetary tightening could be precipitous when the economy turns.

ECB Vice President Guindos said the ECB can't yet say inflation is in check as "we are seeing very big wage increases" in parts of the Eurozone."

The Eurozone Dec Sentix investor confidence index rose +1.8 to -16.8, weaker than expectations of -15.6.

German trade news was weaker than expected as Oct exports unexpectedly fell -0.2% m/m, weaker than expectations of +1.1% m/m.  Also, Oct imports fell -1.2% m/m, weaker than expectations of +0.8 % m/m.

Swaps tied to ECB meeting dates are pricing in a 73% chance that the ECB will reduce its benchmark rate by -25 bp at the March 7 meeting and are more than pricing in (+150%) that -25 bp rate cut at the April 11 ECB meeting.

USD/JPY (^USDJPY) on Monday rose by +0.33%.  On Monday, the yen fell back from a 2-3/4 month high against the dollar and turned lower after T-note yields moved higher.  The yen initially moved higher Monday when the BOJ cut its bond purchases by reducing the amount of 10-25 year bonds it offered to buy Monday to 150 billion yen from 200 billion yen at the last bond buying operation. 

February gold (GCG4) Monday closed down -47.50 (-2.27%), and Mar silver (SIH24) closed down -0.950 (-3.67%).  Precious metals prices Monday gave up early gains and sold off sharply on concern that the markets might be overly optimistic about the odds for the Fed to cut interest rates by Q2-2024.  Metals prices on Monday initially soared, with February gold climbing to a contract high. December gold posted an all-time nearest-futures high, and silver posted a 6-3/4 month high on speculation that global central banks would soon cut interest rates.  However, a rally in the dollar index to a 1-week high and higher bond yields on Monday sparked long liquidation pressures and metal prices fell sharply.   Silver prices were also under pressure after U.S. Oct factory orders fell more than expected, a sign of weakness in industrial metals demand.



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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.