Dollar Supported by US Economic Strength and Hawkish Fed Comments

The dollar index (DXY00) is up by +0.02% today.  The dollar is slightly higher today, supported by better-than-expected US economic news.  Weekly jobless claims unexpectedly fell to a 3.5-month low, a sign of labor market strength, while Q3 nonfarm productivity rose more than expected and Q3 unit labor costs unexpectedly declined, which are positive inflation developments. Also, hawkish comments today from Cleveland Fed President Beth Hammack were positive for the dollar when she said restrictive interest rates are needed to cool inflation.  In addition, today’s +1% increase in WTI crude oil prices has pushed inflation expectations higher, a hawkish factor for Fed policy.

Dollar gains are muted today amid lower T-note yields, which weaken the dollar’s interest rate differentials.  The dollar is also pressured by concerns that the Democrats’ sweep of Congress in the US midterm elections will lead to political gridlock and tougher tech regulation that could curtail foreign demand for US assets. 

US weekly initial unemployment claims unexpectedly fell -6,000 to a 3.5-month low of 189,000, showing a stronger labor market than expectations of an increase to 196,000.

US Q3 nonfarm productivity rose 3.6%, better than expectations of 2.7%.  Q3 unit labor costs unexpectedly fell -0.7%, weaker than expectations of a +0.4% increase.

Cleveland Fed President Beth Hammack said inflation has moved in the wrong direction since March and "I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner."

The markets are now pricing in a 76% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9. 

EUR/USD (^EURUSD) is down by -0.02% today.  Strength in the dollar today is weighing on the euro. Also, higher crude oil prices today are negative for the Eurozone economy and the euro, as Europe imports most of its energy. 

Euro losses are limited today after Eurozone Sep PPI rose the most in 3.5 years, a hawkish factor for ECB policy.  Also, hawkish comments today from ECB Governing Council member Ante Zigman boosted the euro when he said he sees a “rather big chance” of a December rate hike by the ECB.

Eurozone Sep PPI rose +11.1% y/y, stronger than expectations of +10.6% y/y and the largest pace of increase in 3.5 years.

German Sep factory orders rose +4.4% m/m, the largest increase in 6 months but slightly weaker than expectations of +4.5% m/m.

ECB Governing Council member Ante Zigman said, "Inflation has continued to rise in October, and we can say there's a rather big chance of an ECB interest rate increase in December." 

The markets are now pricing in an 82% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17. 

USD/JPY (^USDJPY) is down by -0.32% today.  The yen is moving higher today, garnering some safe-haven demand from a -1.79% decline in the Nikkei Stock Index.  Also, lower T-note yields today are supportive of the yen. 

However, yen gains are limited due to today’s downward revision to the Japan Oct S&P services PMI.  Also, today’s +1% increase in crude oil prices is negative for Japan’s economy and the yen, as Japan imports more than 90% of its energy.

The market is pricing in a 79% chance of a +25 bp BOJ rate hike at its next meeting on December 18.

December COMEX gold (GCZ26) is up +41.70 (+1.02%) today, and December COMEX silver (SIZ26) is down -0.167 (-0.32%).

Precious metals prices are mixed today, with gold posting a 2-week high.  Today’s stock slump has boosted safe-haven demand for precious metals.  Precious metals also have carryover support from the US midterm elections, where the Democratic sweep of Congress could restrain President Trump’s fiscal agenda, which could weigh on the dollar and T-note yields and boost demand for precious metals as a store of value.   

Precious metals fell back from their best level today after the BOE raised interest rates by 25 bp.  Also, hawkish comments today from Cleveland Fed President Beth Hammack weighed on precious metals when she said restrictive interest rates are needed to cool inflation.  In addition, today’s +1% increase in crude oil prices boosts inflation expectations and could persuade the world’s central banks to tighten monetary policy, a bearish factor for precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high on October 21, although those holdings have since backed off.  Long holdings in silver ETFs rose to a 7.75-month high on Tuesday.

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.