Dollar Plummets as Weaker U.S. CPI Report Is Dovish For Fed Policy

The dollar index (DXY00) on Thursday fell sharply by -2.11%.  The dollar tumbled to an 8-week low Thursday. Weaker-than-expected U.S. Oct consumer prices hammered U.S. bond yields and led to expectations for smaller Fed rate hikes.  Also, a sharp rally in stocks and cryptocurrencies Thursday curbed the liquidity demand for the dollar.

Thursday’s U.S. economic news was dovish for Fed policy and bearish for the dollar.  The Oct U.S. CPI rose +7.7% y/y, weaker than expectations of +7.9% y/y and the weakest report in 9 months.  Also, Oct CPI ex-food & energy rose +6.3% y/y, weaker than expectations of +6.5% y/y.  In addition, weekly initial unemployment claims rose +7,000 to 225,000, showing a slightly weaker labor market than expectations of an increase to only 220,000.

Dovish Fed comments Thursday were bearish for the dollar.  Philadelphia Fed President Harker said, "in the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance."  Also, Dallas Fed President Logan said, "while I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy."

EUR/USD (^EURUSD) on Thursday rallied sharply by +1.75%.  The euro Thursday raced up to an 8-week high as a plunge in the dollar sparked euro buying.  The euro also garnered support Thursday on hawkish comments from ECB Executive Board member Schnabel who said the risk of inflation persistence had risen further and the ECB needs to raise interest rates into restrictive territory.

USD/JPY (^USDJPY) on Thursday plummeted by -3.26%.  The yen Thursday soared to a 7-week high against the dollar. Thursday's plunge in T-note yields weakened the dollar’s interest rate differentials and sparked short covering in the yen. 

Thursday’s Japanese economic news was bearish for the yen after Japan Oct machine tool orders fell -5.4% y/y, the biggest decline in 2 years.

December gold (GCZ2) Thursday closed up +40.00 (+2.33%), and December silver (SIZ22) closed up +0.375 (+1.76%).  Precious metals prices Thursday rallied sharply, with gold climbing to a 2-1/4 month high and silver soaring at a 4-1/2 month high.  A plunge in the dollar to an 8-week low Thursday boosted metals prices. Gold prices also rose on a plunge in global government bond yields.  In addition, rising Covid infections in China boosted safe-haven demand for precious metals after China reported 8,404 new Covid infections on Wednesday, the most in more than six months.  Gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a new 2-1/2 year low Monday.

• Stocks Soar as Bond Yields Plunge on Soft U.S. Consumer Prices
• Dollar Climbs as Stocks Swoon and Bond Yields Rise
• Stocks Slip on a Slump in Disney and Higher Bond Yields
• Dollar Drops on Lower T-Note Yields