Dollar Slips on Lower T-Note Yields and Strength in Stocks

The dollar index (DXY00) on Wednesday fell by -0.25%.  Lower T-note yields Wednesday weighed on the dollar.  The dollar was also under pressure after Wednesday’s news showed U.S. manufacturing activity contracted further in December. In addition, the strength in stocks reduced the liquidity demand for the dollar.

The dollar recovered from its worst levels on the hawkish minutes of the Dec 13-14 FOMC meeting and on comments from Minneapolis Fed President Kashkari, who said he favors raising interest rates to 5.4% and then pausing.

Wednesday’s U.S. economic news was mixed for the dollar.  On the bearish side, the Dec ISM manufacturing index fell -0.6 to a 2-1/2 year low of 48.4.  Conversely, the Nov JOLTS job openings fell -54,000 to 10.458 million, showing a stronger labor market than expectations of 10.050 million.

Wednesday’s minutes of the Dec 13-14 FOMC meeting had a hawkish tilt and were supportive of the dollar. The minutes of the Dec 13-14 FOMC meeting showed policymakers were intent on reducing inflation toward their 2% target but were concerned that an "unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee's reaction function, would complicate the committee's effort to restore price stability."

Hawkish comments Wednesday from Minneapolis Fed President Kashkari were bullish for the dollar when he said he favors raising interest rates to 5.4% and then pausing.  He added that higher interest rates might be necessary if inflation remains elevated, and the Fed must learn lessons of the 1970s and avoid premature interest rate cuts.

EUR/USD (^EURUSD) on Wednesday rose by +0.54%.  A weaker dollar Wednesday sparked short covering in the euro.  Also, an easing of the energy crisis is bullish for the euro after European nat-gas prices Wednesday tumbled to a 14-month low.  In addition, an upward revision to the Eurozone Dec S&P Global composite PMI supported the euro.  Weak European inflation news Wednesday was dovish for ECB policy and limited gains in EUR/USD.

The Eurozone Dec S&P Global composite PMI was revised upward by +0.5 to 49.3 from the initially reported 48.8.

The German Nov import price index rose 14.5% y/y, weaker than expectations of +18.0% y/y and the slowest pace of increase in 17 months.

France Dec CPI (EU harmonized) rose +6.7% y/y, weaker than expectations of +7.3% y/y.

USD/JPY (^USDJPY) on Wednesday rose by +1.18%.   The yen retreated Wednesday after the BOJ boosted QE and conducted unscheduled bond-buying for the fourth day.  Lower T-note yields Wednesday were supportive for the yen.

The Japan Dec Jibun Bank manufacturing PMI was revised upward by +0.1 to 48.9 from the initially reported 48.8.

The BOJ Wednesday boosted QE with unscheduled bond-buying for the fourth day, offering to buy 2-year and 5-year debt and 600 billion yen of 1- to 25-year bonds.

February gold (GCG3) on Wednesday closed up +12.90 (+0.70%), and March silver (SIH23) closed down -0.272 (-1.12%).  Precious metals Wednesday settled mixed, with gold climbing to a 6-1/2 month high.  A weaker dollar Wednesday was supportive of metals prices.  Also, lower global government bond yields Wednesday were bullish for gold prices. Silver gave up early gains and turned lower after Wednesday’s economic news showed that U.S. manufacturing activity contracted at the steepest pace in 2-1/2 years, a negative factor for industrial metals demand.

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