Dollar Slumps on Reduced Fed Rate Hike Expectations

The dollar index (DXY00) on Thursday fell by -1.13%.  The dollar Thursday sold off sharply to a 3-1/2 month low on carry-over from Fed Chair Powell’s comments on Wednesday, which cemented expectations for the Fed to slow its pace of interest rate hikes.  Also, a fall in the 10-year T-note yield Thursday to a 2-1/4 month low weakened the dollar’s interest rate differentials. 

Thursday’s U.S. economic news was mixed for the dollar.  On the bearish side, the Nov ISM manufacturing index fell -1.2 to 49.0, weaker than expectations of 49.7 and the steepest pace of contraction in 2-1/2 years. Also, Oct construction spending fell -0.3% m/m, weaker than expectations of -0.2% m/m.  On the bullish side, weekly initial unemployment claims fell -16,000 to 225,000, showing a stronger labor market than expectations of 235,000. Also, Oct personal income rose +0.7% m/m, stronger than expectations of +0.4% m/m and the biggest increase in a year.

Fed comments Thursday were hawkish for Fed policy and bullish for the dollar.  Fed Governor Bowman said, "until I see our actions actually having some impact that would lower the rate of inflation, I think that my expectation would be that we would have a slightly higher peak interest rate than I had anticipated in September."

Also, New York Fed President Williams said further interest rate increases are needed to curb inflation saying, "my view is we need to get the federal funds rate above the inflation rate, and sufficiently above the inflation rate to basically bring downward pressure on inflation."

The Chinese yuan rallied to a 2-week high Thursday as China continues to ease Covid restrictions, bolstering optimism about an economic reopening. 

EUR/USD (^EURUSD) on Thursday rose by +1.06%.  The euro Thursday rallied sharply to a 5-month high. A slump in the dollar Thursday was bullish for the euro.  Also, an unexpected decline in the Eurozone Oct unemployment rate to a record low of 6.5% has bolstered optimism in the Eurozone’s economic outlook and improved sentiment in EUR/USD. 

Thursday’s Eurozone economic news was mixed for EUR/USD.  On the bullish side, the Eurozone Oct unemployment rate unexpectedly fell -0.1 to a record low of 6.5%, showing a stronger labor market than expectations of no change at 6.6%.  Conversely, the Eurozone Nov S&P Global manufacturing PMI was revised downward by -0.2 to 47.1 from the initially reported 47.3.  Also, German Oct retail sales fell -2.8% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 10 months.

Comments Thursday from ECB Governing Council member Stournaras were bearish for the euro when he said, "additional ECB rate increases must be gradual and depend on the inflation outlook while considering the recession risks and the impact on financial stability."

USD/JPY (^USDJPY) on Thursday fell by -1.95%.  The yen Thursday rallied sharply to a 3-1/2 month high as a selloff in the dollar sparked short covering in the yen.  Also, a fall in the 10-year T-note yield to a 2-1/4 month low Thursday boosted the yen.  The yen raced to its high Thursday after comments from BOJ board member Tamura sparked speculation the BOJ would soon adjust monetary policy when he said the BOJ should conduct a policy assessment and the right moment for it could come soon.

Thursday’s Japanese economic news was mixed for the yen.  On the bullish side, Japan's Q3 capital spending ex-software rose +8.0% y/y, stronger than expectations of +6.2% y/y and the biggest increase in more than four years.  However, on the bearish side, the Japan Nov consumer confidence index unexpectedly fell -1.3 to a 2-1/2 year low of 28.6, weaker than expectations of an increase to 30.0.  Also, the Japan Nov Jibun Bank manufacturing PMI was revised downward by -0.4 to 49.0 from the initially reported 49.4, the steepest pace of contraction in 2 years.

February gold (GCG3) on Thursday closed up +55.30 (+3.14%), and March silver (SIH23) closed up +1.060 (+4.87%).  Precious metals Thursday rallied sharply, with gold jumping to a 3-1/2 month high and silver soaring to a 5-3/4 month high.  A slump in the dollar index Thursday to a 3-1/2 month low was bullish for metals prices.  Also, the outlook for the Fed to slow its pace of interest rate hikes was bullish for metals after Wednesday’s comments from Fed Chair Powell confirmed a less aggressive Fed policy.  Silver prices also rallied Thursday after China eased Covid restrictions in some parts of the country, which will boost economic activity that is positive for industrial metals demand.

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