Dollar Falls on Reduced Liquidity Demand as Stocks Rally

The dollar index (DXY00) on Friday fell by -0.24%.  The dollar on Friday posted moderate losses after rallies in the S&P 500 and Nasdaq 100 to new record highs curbed liquidity demand for the dollar.  Also, Friday’s U.S. Dec existing home sales unexpectedly fell to a 13-year low, which was bearish for the dollar.  However, the dollar recouped some of its losses as bond yields rose after U.S. Jan consumer sentiment climbed to a 2-1/2-year high. 

Friday’s U.S. economic news was mixed for the dollar.  On the negative side, Dec existing home sales unexpectedly fell -1.0% m/m to a 13-year low of 3.78 million versus expectations of a +0.3% m/m increase to 3.83 million.  Conversely, the University of Michigan U.S. Jan consumer sentiment index rose +9.1 to a 2-1/2 year high of 78.8, stronger than expectations of 70.1.

Comments Friday from San Francisco Fed President Daly were slightly hawkish and positive for the dollar when she said it's "premature" to think that interest rate cuts by the Fed "are around the corner" and that she needs to see more evidence that inflation is on a consistent trajectory back to 2% before easing policy.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on Jan 30-31 and a 48% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Friday rose by +0.15%.  Dollar weakness on Friday helped the euro to post mild gains. Also, expectations for the ECB to cut interest rates have faded and are supporting EUR/USD as swaps markets now show the chance of an ECB rate cut at the March meeting falling to 16% from more than 50% at the beginning of the month.  However, the upside in the euro was limited after the German Dec PPI fell more than expected, a dovish factor for ECB policy. 

German Dec PPI fell -1.2% m/m and -8.6% y/y, weaker than expectations of -0.4% m/m and -8.0% y/y.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 3% for its next meeting on January 25 and 16% for the following meeting on March 7.

USD/JPY (^USDJPY) on Friday was unchanged.  The yen on Friday yen erased overnight gains and fell to a fresh 1-1/2 month low against the dollar.  Strength in U.S. bond yields weighed on the yen after the 10-year T-note yield rose to a 5-week high.  Another bearish factor for the yen was Friday’s Japan Dec CPI report that showed consumer prices rising at the slowest pace in 1-1/2 years, which was dovish for BOJ policy.  However, losses in the yen were contained by the rise in the 10-year JGB bond yield to a 1-month high of 0.673%.

Japan’s Dec national CPI eased to +2.6% y/y from +2.8% y/y in Nov, the smallest increase in 1-1/2 years. Dec national CPI ex-fresh food and energy eased to +3.7% y/y from +3.8% y/y in Nov, the smallest increase in 10 months.

February gold (GCG4) Friday closed +7.70 (+0.38%), and Mar silver (SIH24) closed -0.096 (-0.42%).  Precious metals on Friday settled mixed.  A weaker dollar on Friday was supportive of metals.  Gold also had safe-haven support from geopolitical risks in the Middle East as Houthi rebels continue to attack ships in the Red Sea off the Yemen coast. 

Higher T-note yields on Friday were bearish for precious metals.  Also, Friday’s rally in the S&P 500 to a new record high reduced safe-haven demand for precious metals.  In addition, the ongoing long liquidation of gold by funds is bearish for gold after long gold holdings in ETFs fell to a 4-year low Thursday. Silver was under pressure after Friday’s report showed U.S. Dec existing home sales unexpectedly fell to a 13-year low, indicating weakened demand for industrial metals. 

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