Dollar Gains on Higher T-note Yields and Safe-Haven

The dollar index (DXY00) on Monday rose by +0.86%.  The main bullish factor was carry-over support from last week’s hawkish comments by several Fed officials and Monday’s +2 bp rise in the 10-year T-note yield to 3.83%, which boosted the dollar’s interest rate differentials.  The dollar also saw some safe-haven demand with the sell-off in stocks, crypto turmoil, and China’s worsening Covid spike where there were three deaths over the weekend.

The dollar was mildly undercut by net-dovish comments from San Francisco Fed President Mary Daly, who mentioned the need for mindfulness about the possibility of tightening too much. The markets are already expecting the Fed to go too far with a hike of about another 125 bp through mid-2023, with the Fed then being forced into a -25 bp rate cut in late-2023 to address a weak economy.  Still, Ms. Daly said she tends to be on the hawkish side of the Fed and that she still thinks the funds rate needs to get to at least 5%.

Ms. Daly said, “As we work to bring policy to a sufficiently restrictive stance – the level required to bring inflation down and restore price stability – we will need to be mindful. Adjusting too little will leave inflation too high.  Adjusting too much could lead to an unnecessarily painful downturn.”  The markets are hoping that more Fed officials will start mentioning the risks of tightening too far given that monetary policy acts with long and variable lags.

Meanwhile, Cleveland Fed President Loretta Mester also delivered dovish remarks when she said, “I think we can slow down from the 75 at the next meeting, I don’t have a problem with that.” She said that policy was entering a new “cadence” now that rates have entered restrictive territory.  The markets are expecting the FOMC at its next meeting on December 13-14 to downshift to a +50 bp rate hike from the +75 bp rate hike seen at each of the last four FOMC meetings.

EUR/USD (^EURUSD) Monday fell by -0.83%, while USD/JPY (^USDJPY) rose +0.85%.  The euro was undercut by the -2 bp decline in the German 10-year bund yield to 1.99%, which undercut the euro’s interest rate differentials.  The euro also saw some carry-over weakness from ECB President Lagarde’s recession warning last Friday when she said, “We expect to raise rates further – and withdrawing accommodation may not be enough.” She said that the “risk of a recession” has increased.

December gold (GCZ2) on Monday closed -14.80 (-0.84%), and December silver (SIZ22) closed -0.125 (-0.60%).  Precious metals were undercut Monday by the +0.8% rally in the dollar index.  Silver saw additional downward pressure from concern about industrial metals demand with the Chinese Covid spike.  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 Friday.

• Stocks Lower on Chinese Covid Concerns
• Dollar Gains on Higher T-note Yields
• Stocks See Support from Retailer and Trade News
• Dollar Gains on Hawkish Fed Comments