Dollar Weakens on Improved Fed Rate Cut Prospects

The dollar index (DXY00) today is down by -0.08%.  The dollar is slightly lower today and is holding just above Thursday's 5-week low.  Today's strength in stocks has reduced liquidity demand for the dollar.  The dollar is also under pressure amid expectations that the Fed will cut interest rates at next week's FOMC meeting.  Losses in the dollar are limited after the University of Michigan's US Dec consumer sentiment index rose more than expected.

President Trump said on Tuesday that he will announce his selection for the new Fed Chair in early 2026.  Bloomberg reported last week that National Economic Council Director Kevin Hassett is seen as the likely choice to succeed Powell.  Hassett's nomination would be bearish for the dollar as he is seen as the most dovish candidate.  In addition, Fed independence would come into question, as Hassett supports President Trump's approach to cutting interest rates at the Fed.

US Sep personal spending rose +0.3% m/m, right on expectations. Sep personal income rose +0.4% m/m, stronger than expectations of +0.3% m/m.

The US Sep core PCE price index, the Fed's preferred inflation gauge, rose +0.3% m/m and +2.8% y/y, right on expectations.

The University of Michigan US Dec consumer sentiment index rose by +2.3 points to 53.3, stronger than expectations of 52.0.

The University of Michigan US Dec 1-year inflation expectations eased to 4.1%, better than expectations of no change at 4.5% and the smallest pace of increase in 11 months.  Dec 5-10 year inflation expectations eased to +3.2%, better than expectations of no change at 3.4% and the smallest pace of increase in 11 months.

The markets are discounting a 95% chance that the FOMC will cut the fed funds target range by 25 bp at the next FOMC meeting on December 9-10.

EUR/USD (^EURUSD) today is up by +0.10%.  The euro is stronger today and is modestly below Thursday's 6-week high.  The weaker dollar today is supportive of the euro.  Also, stronger-than-expected Eurozone economic news is bullish for the euro, after Q3 Eurozone GDP was revised higher and German Oct factory orders rose more than expected. 

Also, divergent central bank policies are supportive of the euro, with the ECB having finished with its rate-cutting cycle while the Fed is expected to keep cutting interest rates.

Eurozone Q3 GDP was revised up slightly to +0.3% q/q and +1.4% y/y from the previously reported +0.2% q/q and +1.4% y/y.

German Oct factory orders rose +1.5% m/m, stronger than expectations of +0.3% m/m.

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.

USD/JPY (^USDJPY) today is up by +0.05%.  The yen fell from a 3-week high against the dollar and moved slightly lower as higher T-note yields sparked long liquidation in the yen.  Today's weaker-than-expected report on Japan's Oct household spending is also bearish for the yen.

The yen initially moved higher today on a Bloomberg report that said BOJ officials are ready to raise interest rates later this month, provided there's no major shock to the economy or financial markets in the meantime.  Also, today's report that showed the Japan Oct leading index CI rose more than expected to a 17-month high was bullish for the yen.  In addition, higher Japanese government bond yields have strengthened the yen's interest rate differentials, with the 10-year JGB yield rising to an 18-year high of 1.951% today. 

The markets are discounting an 89% chance of a BOJ rate hike at the next policy meeting on December 19.

February COMEX gold (GCG26) today is up +26.40 (+0.62%), and March COMEX silver (SIH26) is up +1.559 (+2.71%).

Gold and silver prices are moving higher today.  Precious metals are supported by today's weaker dollar.  Also, increased inflation expectations have boosted demand for gold as a hedge against inflation after the 10-year breakeven inflation rate rose to a 2-week high today.  Precious metals extended their gains today after the Sep core PCE price index, the Fed's preferred inflation gauge, rose as expected, cementing expectations of a Fed rate cut next week.  Silver prices have carryover support from today's rally in copper, which reached a 4-month high.

Gains in precious metals are limited due to higher global bond yields.  Precious metals prices were also undercut by a Bloomberg report that said BOJ officials are ready to raise interest rates later this month, provided there's no major shock to the economy or financial markets.

Precious metals have underlying support from expectations that the Fed will cut interest rates at next week's FOMC meeting, as markets are now discounting a 95% chance that the FOMC will cut the fed funds target range by 25 bp at the December 9-10 FOMC meeting, up from 30% two weeks ago.  Precious metals also have safe-haven demand tied to uncertainty over US tariffs and geopolitical risks in Ukraine and the Middle East. 

Silver has support due to concerns about tight Chinese silver inventories.  Silver inventories in warehouses linked to the Shanghai Futures Exchange on November 21 fell to 519,000 kilograms, the lowest level in 10 years.

Strong central bank demand for gold is supportive of prices, following the most recent news that showed bullion held in China's PBOC reserves rose to 74.09 million troy ounces in October, the twelfth consecutive month the PBOC has boosted its gold reserves.  Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up 28% from Q2. 

Since posting record highs in mid-October, long liquidation pressures have weighed on precious metals prices, as ETF holdings have recently fallen after reaching 3-year highs on October 21.  However, fund demand for silver has rebounded, as long holding in silver ETFs rose to a 3.25-year high on Thursday.