Dollar Rallies on Stock Weakness and Higher T-note Yield

The dollar index (DXY00) on Monday rose by +0.70%.  The dollar moved higher on Monday’s sell-off in stocks, which boosted liquidity demand for the dollar.  The dollar was also boosted by Monday’s +7 bp rise in the 10-year T-note yield to 4.08%.  Also, expectations for the FOMC to raise the fed funds target range by 75 bp on Wednesday underpinned the dollar. 

Monday’s U.S. economic news was weaker than expected and bearish for the dollar.  The Oct MNI Chicago PMI unexpectedly fell -0.5 to 45.2, weaker than expectations of an increase to 47.3 and the steepest pace of contraction in 2-1/4 years.  Also, the Oct Dallas Fed manufacturing outlook level of general business activity fell -2.2 to -19.4, weaker than expectations of -17.4.

EUR/USD (^EURUSD) fell by -0.78%.  The euro was undercut by dovish comments today from ECB Governing Council member Visco, who said the ECB should “move gradually” in the face of economic risks.

Monday’s Eurozone economic news was mixed for the euro.  The Eurozone Oct CPI rose by a record +10.7% y/y, stronger than expectations of +10.3% y/y.  Also, the Eurozone Oct core CPI rose by a record +5.0% y/y, right on expectations.  In addition, Eurozone Q3 GDP rose +0.2% q/q and +2.1% y/y, close to expectations. Finally, German Sep retail sales unexpectedly rose +0.9% m/m, stronger than expectations of a -0.5% m/m decline and the biggest increase in 8 months.

ECB Governing Council member Visco said the ECB should "move gradually" in raising interest rates to fight inflation because of the uncertain nature of economic forecasting amid Russia's war in Ukraine.

USD/JPY (^USDJPY) rose by +0.87%.  The yen was undercut by weaker-than-expected Japanese consumer confidence and industrial production reports.  Also, the yen had negative carry-over from last Friday when the BOJ said it would increase the amounts of longer-term government bonds it buys starting next month by increasing the frequency of its monthly asset purchases.

The Japan Oct consumer confidence index fell -0.9 to a 1-3/4 year low of 29.9, weaker than expectations of -0.3 to 30.5.

Japan Sep industrial production fell -1.6% m/m, weaker than expectations of -0.8% m/m and the biggest decline in 4 months.

Japan Sep retail sales rose +1.1% m/m, stronger than expectations of +0.8% m/m.

December gold (GCZ2) on Monday closed -4.10 (-0.25%), and December silver (SIZ22) closed down -0.028 (-0.15%).  Precious metals prices fell on Monday due to strength in the dollar.  Also, higher global government bond yields undercut gold prices.  In addition, expectations for the FOMC to raise the fed funds target range by 75 bp on Wednesday are bearish for metals prices.  Gold has been undercut by fund liquidation as long positions in gold ETF’s dropped to a 2-1/2 year low last Friday.

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