Dollar is Undercut by Lower T-note Yields

The dollar index (DXY00) fell -0.16% on Thursday as the 10-year T-note yield fell -4 bp, undercutting US interest rate differentials.  The 2-year T-note yield fell -5 bp on Thursday.

The dollar found underlying support from a stronger-than-expected US GDP report of +3.4% and safe-haven demand as stocks fell.

Markets largely took Wednesday’s FOMC meeting results in stride.  The FOMC left its federal funds rate target unchanged at 3.75-4.00%, as the market expected.  The markets are now pricing in a 78% chance of a rate hike at the FOMC’s next meeting on December 8-9. 

US Q3 GDP (annualized q/q) rose to +3.4% from +2.2% in Q2 and was stronger than market expectations of +3.2%.  Q3 personal consumption was unchanged at a strong +3.8%, stronger than market expectations of +3.4%.

Thursday’s US PCE deflator was exactly in line with market expectations.  The Sep PCE price index rose +0.5% m/m and +3.6% y/y, while the Sep core price index rose +0.3% m/m and +3.1% y/y.  The core PCE price index in September rose to +3.1% y/y from +3.0% in August and was just below May’s 2.5-year high of +3.2%.  The core PCE price index has been consistently above the Fed’s +2% inflation target for the past five years.

Sep personal income rose +0.2% m/m, slightly below market expectations of +0.3% m/m.  Sep personal spending rose +0.5% m/m, slightly below market expectations of +0.6%.

Weekly initial unemployment claims fell -1,000 to 194,000, showing a slightly stronger labor market than market expectations of 198,000.  Weekly continuing unemployment claims fell to 1.701 million from a revised 1.722 million, showing a slightly stronger labor market than market expectations of 1.720 million.

The dollar has underlying safe-haven support from Middle East tensions as concerns continue about Houthi attacks on Saudi Arabia and speculation about whether the US will launch a new military attack on Iran after Tuesday’s (Nov 3) US election.  Mediation efforts are underway to see whether a temporary peace agreement can be reached, and Vice President Vance reportedly reached out to a hardline Iranian security leader to see whether there is a basis for negotiations. However, the Wall Street Journal reported late Tuesday that the US has told several Persian Gulf countries to be prepared for a short, intense military campaign against Iran.  WSJ said President Trump hasn’t yet decided to proceed with the attack but is leaning toward an attack after next Tuesday’s mid-term elections. 

EUR/USD (^EURUSD) rose +0.08% on dollar weakness.

The ECB at its meeting Thursday left its deposit rate unchanged at 2.50%, as the market expected. Separately, ECB President Christine Lagarde announced she will step down on February 7, 2027, paving the way for a successor to be named by year-end.  The markets are now pricing in an 84% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17. 

USD/JPY (^USDJPY) rose +0.07%.  The yen has weakened this week, after last week’s safe-haven strength during the sharp sell-off in global stock markets.

The yen has underlying support on expectations that the BOJ will maintain a hawkish policy bias at its meeting this Friday, likely raising its inflation forecast for fiscal 2027.  The odds of a BOJ rate hike at Friday’s meeting are very low at 2%, although those odds rise to 83% for a BOJ rate hike at the following meeting on December 18. 

December COMEX gold (GCZ26) closed down -20.20 (-0.50%) on Thursday, and December COMEX silver (SIZ26) closed down -2.40%.

Precious metals prices were undercut by the sell-off in stocks, which may have caused some investors to sell precious metals positions to cover stock losses.  Precious metals prices had support from a slightly lower dollar and the -5 bp decline in the 10-year T-note yield.

Gold has underlying safe-haven support from Middle East tensions, with persistent attacks by the Houthis on Saudi targets and speculation about a possible new US military attack on Iran after next Tuesday’s US election.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high last Wednesday, although those holdings have since backed off.  Long holdings in silver ETFs rose to a 7.5-month high on Thursday.

Strong central bank demand for gold is supporting gold prices, after recent news showed that bullion held in China's PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third consecutive month the PBOC boosted its gold reserves.  However, Russia’s central bank, the sixth-largest central-bank gold holder, said on October 20 that it reduced its gold reserves to a 7-year low of 72.8 million ounces as of October 1.

On the date of publication, Rich Asplund did not directly have a position 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.