Dollar Falls Along With Bond Yields

The dollar index (DXY00) on Friday fell by -1.10%.  The dollar Friday retreated from a 1-month high and sold off sharply after T-note yields plunged when the U.S. Dec ISM services report showed the service sector contracted at the steepest pace in 2-1/2 years.  The dollar extended its losses after stocks rallied sharply, which curbed liquidity demand for the dollar.

The dollar initially rallied in overnight trade on weakness in EUR/USD, which fell to a 4-week low after Eurozone Dec CPI rose less than expected.  Also, the yen fell to a 2-1/2 week low against the dollar after Japan’s Nov real cash earnings fell by the most since 2014, which is dovish for BOJ policy.  Friday’s U.S. Dec payroll report was mixed for the dollar as it showed job gains rose more than expected, but wage growth slowed more than expected. 

Friday’s U.S. economic news was mixed for the dollar.  On the bearish side, the Dec ISM services index fell -6.9 to 49.6, weaker than expectations of 55.0 and the steepest pace of contraction in 2-1/2 years.  Also, Nov factory orders fell -1.8% m/m, weaker than expectations of -1.0% m/m and the biggest drop in 2-1/2 years.  On the bullish side, Dec nonfarm payrolls rose +223,000, stronger than expectations of +203,000.  Also, the Dec unemployment rate unexpectedly fell -0.1 to 3.5%, matching a 53-year low and showing a stronger labor market than expectations of 3.7%.

Fed comments Friday were mainly on the hawkish side and were bullish for the dollar.  Atlanta Fed President Bostic said inflation is still too high, and that he favors raising the fed funds rate above 5% and holding it there into 2024.  Also, Richmond Fed President Barkin said, "we still have work to do" to bring inflation down to the Fed's 2% goal.

On the bearish side for the dollar were dovish comments from Fed Governor Cook, who said that although inflation is still too high, she sees signs of ebbing inflation, including a topping out of increases for new rentals and easing supply shortages of key materials.

EUR/USD (^EURUSD) on Friday rose by +1.19%.  The euro Friday recovered from a 4-week low and rallied sharply after the dollar sold off on a weak U.S. Dec ISM services report. EUR/USD initially fell to a 4-week low in overnight trade after Eurozone Dec CPI rose less than expected, which was dovish for ECB policy. 

Eurozone Dec economic confidence rose +1.8 to a 4-month high of 95.8, stronger than expectations of 94.7.

The Eurozone Dec CPI eased to 9.2% y/y from 10.1% y/y in Nov, weaker than expectations of +9.5% y/y. However, Dec core CPI rose to 5.2% y/y, stronger than expectations of +5.1% y/y.

Eurozone Nov retail sales rose +0.8% m/m, stronger than expectations of +0.6% m/m.

German Nov factory orders fell -5.3% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 13 months.

USD/JPY (^USDJPY) on Friday fell by -0.98%.   The yen Friday recovered sharply from a 2-1/2 week low against the dollar after T-note yields plunged on a weak U.S. Dec ISM services report. The yen initially came under pressure in overnight trade on news that showed Japan’s Dec real cash earnings contracted at the steepest pace in 8-1/2 years, which was dovish for BOJ policy. Also, the action by the BOJ Friday to boost bond purchases weighed on the yen.

Friday’s Japanese economic news was bearish for the yen.  Japan Nov real cash earnings fell -3.8% y/y, weaker than expectations of -2.8% y/y and the biggest decline in 8-1/2 years.  Also, the Japan Dec Jibun Bank services PMI was revised downward by -0.6 to 51.1 from the initially reported 51.7.

The BOJ announced additional bond purchases for the fifth time in the last six sessions, buying an additional 300 billion yen ($2.2 billion) of five-to-10-year notes.

February gold (GCG3) on Friday closed up +29.10 (+1.58%), and March silver (SIH23) closed up +0.558 (+2.38%).  Precious metals Friday rallied, with gold climbing to a 6-1/2 month high.  A reversal in the dollar Friday sparked a rally in metals after the dollar index fell back from a 1-month high and moved sharply lower.  Also, lower global government bond yields Friday fueled buying of gold. 

• Stocks Rally as Bond Yields Plunge on U.S. Reports
• Dollar Rallies on Strong U.S. Labor Market Reports
• U.S. Labor Market Strength and Hawkish Fed Comments Hammer Stocks
• Dollar Slips on Lower T-Note Yields and Strength in Stocks