Dollar Plunges for Second Day as Rate-Hike Concerns Ease

The dollar index (DXY00) on Friday fell by -1.67%, adding to Thursday’s -1.7% plunge.  The dollar Friday sold off for a second day on negative carry-over from Thursday’s weaker-than-expected U.S. Oct CPI report, which bolstered speculation the Fed will ease its pace of interest rate hikes.  The dollar extended its losses Friday after the University of Michigan U.S. Nov consumer sentiment index fell more than expected to a 4-month low. 

Comments from Boston Fed President Collins were dovish for Fed policy and bearish for the dollar when she said, "I think that as we have raised interest rates that the risk of overtightening has increased."

EUR/USD (^EURUSD) on Friday rose by +1.44%.  The euro Friday rallied sharply for a second day as a plunge in the dollar sparked short covering in EUR/USD.  Also, a jump in European government bond yields strengthened the euro’s interest rate differentials as the 10-year German bund yield Friday rose +15.0 bp to 2.160% after the European Commission raised its 2022 and 2023 Eurozone CPI forecasts. 

Specifically, the EU Commission raised its Eurozone 2022 GDP forecast to +3.2% from a July forecast of +2.6% and raised its Eurozone 2022 CPI forecast to +8.5% from +7.6%.  Also, the EU Commission cut its Eurozone 2023 GDP forecast to +0.3% from a July forecast of +1.4% and raised its Eurozone 2023 CPI forecast to +6.1% from a July forecast of +4.0%.

USD/JPY (^USDJPY) on Friday fell by -1.74%.  The yen Friday rallied sharply for a second day and posted a 2-1/4 month high against the dollar.  The yen has rallied as the dollar plunges on speculation the Fed will slow its pace of interest rate hikes.  An easing of Japan’s producer price pressures was supportive for the yen after Japan Oct PPI eased to +9.1% y/y from+10.2% y/y in Sep.

December gold (GCZ2) Friday closed up +15.70 (+0.90%), and December silver (SIZ22) closed down -0.035 (-0.13%).  Precious metals prices Friday settled mixed, with gold climbing to a 2-1/2 month high. A plunge in the dollar index to a 2-3/4 month low Friday was bullish for metals prices.  Gold prices also found support after the University of Michigan U.S. Nov 5-10-year inflation expectations rate unexpectedly rose +0.1 to 3.0%, which boosted demand for gold as an inflation hedge.   Gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a new 2-1/2 year low Thursday.

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