Dollar Falls Back as Signs of Slower Inflation May Slow Fed Rate Hikes

The dollar index (DXY00) on Tuesday fell by -0.30%.  The dollar Tuesday tumbled to a 3-month low as signs of slower inflation pushed T-note yields lower and undercut the dollar.  Also, a sharp rally in stocks Tuesday curbed the liquidity demand for the dollar.  The dollar recovered some of its losses on the increase in safe-haven demand on concern about an escalation of the conflict in Ukraine after the AP reported that Russian missiles crossed into Poland, killing two people. 

Tuesday’s U.S. Oct producer price report was dovish for Fed policy and bearish for the dollar.  U.S. Oct PPI final demand rose +8.0% y/y, weaker than expectations of +8.3% y/y and the slowest pace of increase in 15 months. Also, Oct PPI ex-food & energy rose +6.7% y/y, weaker than expectations of +7.2% y/y and the slowest pace of increase in 15 months.

Tuesday’s U.S. economic news was bullish for the dollar after the Nov Empire manufacturing survey general business conditions rose +13.6 to a 4-month high of 4.5, stronger than expectations of -6.0.

Fed comments Tuesday 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." 

EUR/USD (^EURUSD) on Tuesday closed up by +0.36%.  The euro Tuesday rallied to a 4-1/2 month high as a slump in the dollar sparked short covering in EUR/USD.  Also, Tuesday's better-than-expected German wholesale price and investor sentiment reports boosted the euro. 

EUR/USD fell back from its best levels Tuesday on dovish comments from ECB Council member Villeroy de Galhau who said the ECB might shift to a slower pace of rate hikes next year. Also, the euro gave up some of its gains on concern about an escalation of the war in Ukraine after the AP reported Russian missiles crossed into Poland and killed two people.

The German Oct wholesale price index eased to +17.4% y/y from the +19.9% y/y pace in Sep, the smallest pace of increase in 8 months.

The German ZEW expectations of economic growth index rose +22.5 to a 5-month high of -36.7, stronger than expectations of -51.0.

ECB Council member Villeroy de Galhau said the ECB might shift to a slower pace of rate hikes next year after bringing interest rates to a "normalization range" of around 2.0% in December, up from +1.5% currently.

USD/JPY (^USDJPY) on Tuesday fell by -0.52%.  The yen Tuesday climbed to a 2-1/2 month high against the dollar.  A slump in T-note yields Tuesday supported the yen.  Gains in the yen were limited after Tuesday’s economic news showed the Japanese economy unexpectedly contracted in Q3, which is dovish for BOJ policy.

Japan's Q3 GDP unexpectedly contracted by -1.2% y/y, weaker than expectations of +1.2% y/y.  The Q3 deflator fell -0.5% y/y, the seventh consecutive quarter of contraction.

December gold (GCZ2) Tuesday closed down -0.10 (-0.01%), and December silver (SIZ22) closed down -0.595 (-2.69%).  Precious metals prices Tuesday closed lower, with gold falling back from a 3-month high and silver prices retreating from a 5-month high as a sharp rally in stocks reduced the safe-haven demand for precious metals. 

Gold was also under pressure Tuesday after U.S Oct PPI rose less than expected, curbing demand for gold as an inflation hedge.  Silver also fell back after new Covid infections in China rose to a new 6-month high Monday, which may keep pandemic lockdowns in place that reduce economic activity and demand for industrial metals.   Metals prices Tuesday initially moved higher after the dollar index tumbled to a 3-month low.  Gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a new 2-1/2 year low last Thursday.

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