Dollar Sinks as Fed Cuts Rates and Boosts Liquidity

The dollar index (DXY00) on Wednesday fell to a 6-week low and finished down by -0.63%.  The dollar retreated on Wednesday after the FOMC cut the federal funds target range by -25 bp.  The dollar was also pressured on Wednesday after the US Q3 employment cost index rose less than expected, a dovish factor for Fed policy.  The dollar sank to its low after the Fed said it will boost liquidity in the financial system and begin purchasing $40 billion a month in T-bills.

Positives for the dollar included the FOMC raising its US 2025 GDP forecast and lowering its core PCE price forecast.  Also, comments from Fed Chair Powell were supportive of the dollar when he signaled that the Fed may pause its interest rate-cutting campaign. 

The dollar has also been undercut recently by concerns that President Trump intends to appoint a dovish Fed Chair, which would be bearish for the dollar.  Mr. Trump said last that he will announce his selection for the new Fed Chair in early 2026.  Bloomberg reported last week that National Economic Council Director Kevin Hassett is the most likely choice as the next Fed Chair, seen by markets as the most dovish candidate.

The US Q3 employment cost index rose +0.8% q/q, slightly weaker than expectations of +0.9% q/q.

The FOMC, as expected, cut the fed funds target range by 25 bp to 3.50%-3.75% in a 9-3 vote and said it will consider "the extent and timing of additional adjustments" to interest rates.  The FOMC noted that "job gains have slowed this year" and "downside risks to employment rose in recent months."  Also, "inflation has moved up since earlier in the year and remains somewhat elevated."

The Fed's "dot plot" of interest rate projections shows the median forecast for the fed funds rate is 3.375% for the end of 2026, implying one 25 bp rate cut next year, unchanged from September.

The FOMC raised its 2025 GDP estimate to 1.7% from 1.6% in September and raised its 2026 GDP estimate to 2.3% from 1.8% in September. The FOMC cut its 2025 core PCE price estimate to 3.0% from 3.1% in September and cut its 2026 core PCE price estimate to 2.5% from 2.6% in September.

The Fed said it will begin buying $40 billion of Treasury bills per month starting December 12 to rebuild reserves in the financial system, which shrank as it tightened its balance sheet.

Fed Chair Powell signaled the Fed may now pause its interest rate cutting campaign when he said the Fed is now "within a range of plausible estimates of neutral and leave us well positioned to determine the extent and timing of additional adjustments" to rates.  He added that he doesn't think a rate hike is anybody's base case for the Fed's next policy move.

The markets are discounting a 24% chance that the FOMC will cut the fed funds target range by 25 bp at the January 27-28 FOMC meeting.

EUR/USD (^EURUSD) rallied to a 1.75-month high on Wednesday and finished up by +0.54%.  The euro rose on Wednesday amid a weaker dollar.  Also, hawkish ECB comments on Wednesday were supportive of the euro after ECB President Lagarde said the ECB will likely raise its economic growth forecasts at next week's policy meeting, and ECB Governing Council member Simkus said he sees no further ECB interest rate cuts.

ECB President Lagarde said the ECB will likely raise its economic growth forecasts at next week's policy meeting, reflecting a more optimistic outlook. 

ECB Governing Council member Simkus said, "We have an inflation rate that is more or less close to the 2% target in the medium term, which suggests no need for a change in interest rates, not only at the next ECB meeting in December but also in further meetings."

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.

USD/JPY (^USDJPY) on Wednesday fell by -0.55%.  The yen moved higher on Wednesday amid a weaker dollar. Also, Wednesday's economic news showed that Japan's producer prices remained above 2% last month, a hawkish factor for BOJ policy that is supportive of the yen.  Gains in the yen accelerated today after T-note yields moved from higher to lower on the day.

The Japan Nov PPI rose +2.7% y/y, unchanged from Oct and right on expectations.

The markets are discounting an 82% chance of a BOJ rate hike at the next policy meeting on December 19.

February COMEX gold (GCG26) on Wednesday closed down -11.50 (-0.27%), and March COMEX silver (SIH26) closed up +0.189 (+0.31%).

Gold and silver prices settled mixed on Wednesday, with Mar silver posting a contract high and nearest-futures (Z25) posting an all-time high of $61.44 a troy ounce. 

Wednesday's weaker dollar was a bullish factor for metals.  Also, the FOMC's action to cut the federal funds target range by 25 bp on Wednesday was supportive of precious metals.  In addition, precious metals have safe-haven demand tied to uncertainty over US tariffs and geopolitical risks in Ukraine and the Middle East. 

Hawkish central bank comments on Wednesday weighed on precious metals prices.   Fed Chair Powell signaled the Fed may now pause its interest rate cutting campaign when he said the Fed is now "within a range of plausible estimates of neutral and leave us well positioned to determine the extent and timing of additional adjustments" to rates.  Also, ECB President Lagarde said the ECB will likely raise its economic growth forecasts at next week's policy meeting, reflecting a more optimistic outlook.  In addition, ECB Governing Council member Simkus said he sees no more interest rate cuts from the ECB due to stronger economic activity and inflation.

Strong central bank demand for gold is supportive of prices, following the recent news that bullion held in China's PBOC reserves rose by +30,000 ounces to 74.1 million troy ounces in November, the thirteenth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up +28% from Q2. 

Silver has support due to concerns about tight Chinese silver inventories.  Silver inventories in warehouses linked to the Shanghai Futures Exchange on November 21 fell to 519,000 kilograms, the lowest level in 10 years.

Since posting record highs in mid-October, long liquidation pressures have weighed on precious metals prices, as ETF holdings have recently fallen after reaching 3-year highs on October 21.  However, fund demand for silver has rebounded, as long holding in silver ETFs rose to a 3.25-year high last Friday.

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.