The dollar index (DXY00) on Wednesday ended the day little changed after rebounding from an early 7-1/2 month low. The dollar recovered its early losses as a sell off in stocks boosted the liquidity demand for the dollar. Also, hawkish comments from Cleveland Fed President Mester and St. Louis Fed President Bullard gave the dollar a boost.
The dollar index Wednesday initially tumbled to a 7-1/2 month low after weaker-than-expected U.S. Dec retail sales and Dec manufacturing production reports hammered T-note yields and fueled speculation the Fed will slow its rate-hike regime.
Wednesday’s U.S. economic news was mainly dovish for Fed policy and bearish for the dollar. Dec retail sales fell -1.1% m/m, weaker than expectations of -0.9% m/m and the biggest decline in a year. Also, Dec PPI final demand rose +6.2% y/y, weaker than expectations of +6.8% y/y and the smallest gain in 1-3/4 years. In addition, Dec manufacturing production fell -1.3% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 1-3/4 years. Conversely, the Jan NAHB housing market index rose +4 to 35, stronger than expectations of no change at 31.
Fed comments Wednesday were hawkish for Fed policy and supportive of the dollar. Cleveland Fed President Mester said the Fed's interest rate increases are calming inflation as intended, but more hikes are needed to squash high prices. Also, St. Louis Fed President Bullard said U.S. interest rates are "almost" into a zone that we could call restrictive, and "monetary policy has to stay on the tighter side during 2023" as the disinflationary process unfolds.
The Fed’s Beige Book was neutral for the dollar. The Beige Book said that in the month through Jan 9, "economic activity was relatively unchanged since the prior report and selling prices increased at a modest or moderate pace in most Fed districts, though many said that the pace of increases had slowed from that of recent reporting periods."
EUR/USD (^EURUSD) on Wednesday rose by +0.06%.  The euro Wednesday climbed to an 8-3/4 month high. Hawkish comments Wednesday from ECB Governing Council member Villeroy de Galhau gave EUR/USD a boost when he said ECB President Lagarde's guidance for the ECB to continue to raise interest rates by 50 bp is still valid. The euro gave up most of its advance after the dollar recovered from a 7-1/2 month low and was little changed.
Wednesday’s economic news was mixed for EUR/USD. On the positive side, Eurozone Dec new car registrations rose +12.8% y/y, the fifth consecutive month of increase. Conversely, Eurozone Nov construction output fell -0.8% m/m.
USD/JPY (^USDJPY) on Wednesday rose by +0.55%.  The yen weakened Wednesday after the BOJ refrained from changing monetary policy after its meeting and said it would ramp up bond purchases if needed to keep the 10-year bond yield below its 0.50% upper range of the 10-year yield target. The yen recovered from its worst levels Wednesday after T-note yields plunged.
Wednesday’s Japanese economic news was bearish for the yen after Nov core machine orders fell -8.3% m/m, weaker than expectations of -1.0% m/m and the biggest decline in 9 months.
The BOJ voted 9-0 to keep its policy balance rate at -0.1% and to maintain its trading band of 50 bp around 0% for the 10-year JGB yield. The BOJ said it would continue large-scale bond buying and increase purchases on a flexible basis if needed.
The BOJ cut its 2023 Japan GDP forecast to 1.7% from 1.9% and raised its 2023 core CPI ex-energy forecast to 1.8% from 1.6%.
February gold (GCG3) on Wednesday closed down -2.90 (-0.15%), and March silver (SIH23) closed down -0.421 (-1.75%). Precious metals Wednesday gave up early gains and closed moderately lower. A recovery in the dollar Wednesday weighed on metals prices after the dollar index rebounded from a 7-1/2 month low and was little changed. Â
Hawkish comments Wednesday from St. Louis Fed President Bullard and Cleveland Fed President Mester also weighed on metals prices when they both called for the Fed to keep raising interest rates. Wednesday’s weak U.S. retail sales and manufacturing production reports signaled weakness in industrial metals demand and were bearish for silver prices.
More Forex News from Barchart
- Stocks Give Up Early Gains as Economic Growth Slows
- Dollar Moves Higher with T-Note Yields
- Stocks in the Red After Mixed Earnings Releases
- Dollar Under Pressure as Stocks Rally and Yen Strengthens
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
/NVIDIA%20Corp%20logo%20outside%20building-by%20BING-JHEN_HONG%20via%20iStock.jpg)
/Elon%20Musk%2C%20founder%2C%20CEO%2C%20and%20chief%20engineer%20of%20SpaceX%2C%20CEO%20of%20Tesla%20by%20Frederic%20Legrand%20-%20COMEO%20via%20Shutterstock.jpg)
