Dollar Rallies Sharply on Hawkish Fed

The dollar index (DXY00) Thursday rallied to a 1-1/2 week high and rose sharply by +1.36%.  The dollar soared Thursday on carry-over support from Wednesday when Fed Chair Powell signaled higher interest rates for longer.  Also, a jump in T-note yields strengthened the dollar’s interest rate differentials after the 10-year T-note yield Thursday climbed to a 1-week high of 4.221%.

Thursday’s U.S. economic news was mixed for the dollar.  On the positive side, weekly initial unemployment claims unexpectedly fell -1,000 to 217,000, showing a slightly stronger labor market than expectations of an increase to 220,000.  Also, Sep factory orders rose +0.3% m/m, right on expectations.  On the negative side, the Oct ISM services index fell -2.3 to a nearly 2-1/2 year low of 54.4, weaker than expectations of 55.3.  Also, the Sep trade deficit of -$73.3 billion was wider than expectations of -$72.2 billion.  Meanwhile, Q3 nonfarm productivity rose +0.3%, weaker than expectations of +0.5%. 

EUR/USD (^EURUSD) on Thursday fell by -0.59% and posted a 1-1/2 week low.  A stronger dollar weighed on the euro.  The euro saw underlying support from hawkish ECB comments and the rise in the 10-year German bund yield to a 1-week high of 2.300%.

ECB comments Thursday were hawkish for monetary policy and supportive of the euro.  ECB President Lagarde warned that a "mild recession" is possible, but "we don't believe it will be able to tame inflation."  Also, ECB Governing Council member Kazaks said, "it's clear that interest rates will need to rise much higher to bring inflation down to the target of 2% over the medium term."

USD/JPY (^USDJPY) on Thursday rose by +0.22%.  A jump in the 10-year T-note yield to a 1-week high weighed on the yen.  However, losses in the yen were limited after Japanese Finance Minister Suzuki warned that Japan could intervene in the currency market “at any time” to support the yen.   Trading activity in the yen was subdued Thursday, with Japanese markets closed for the Culture Day holiday.

December gold (GCZ2) on Thursday closed down -19.10 (-1.16%), and December silver (SIZ22) closed down -0.164 (-0.84%).  Precious metals prices Thursday posted moderate losses, with gold falling to a 5-week low and silver dropping to a 1-week low.  Wednesday’s hawkish comments from Fed Chair Powell boosted the dollar Thursday and sent metals prices tumbling.  Also, higher global bond yields Thursday weighed on gold prices. Gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a 2-1/2 year low Wednesday.

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