Dollar Extends its Post-Election Rally to a 1-Year High

The dollar index (DXY00) Wednesday rose by +0.41% and posted a 1-year high. The dollar index Wednesday recovered from early losses and turned higher as it extended the post-election rally on speculation that T-note yields will increase as inflation increases due to President-elect Trump’s pro-tariff policies.  The dollar Wednesday initially moved lower as T-note yields fell on the as-expected US Oct CPI report.  The benign inflation report boosted the chances to 82% for the Fed to cut interest rates by 25 bp next month from 62% before the report, a negative factor for the dollar. 

US Oct CPI rose +0.3% m/m and +2.6% y/y, right on expectations.  Oct CPI ex-food and energy remained unchanged from Sep at +3.3% y/y, right on expectations.

Minneapolis Fed President Kashkari said inflation is headed in the right direction, and he doesn't think inflation is stuck above the Fed's 2% target.

Dallas Fed President Logan said, "I anticipate the FOMC will most likely need more rate cuts to finish the journey," but policymakers should "proceed cautiously" given uncertainties about how restrictive monetary policy currently is.

St. Louis Fed President Musalem said, "Monetary policy is well positioned to return inflation to target and support maximum employment through gradual adjustments of the policy rate toward a neutral level over time, provided inflation continues to fall toward 2%."

The markets are discounting the chances at 82% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Wednesday fell by -0.56% and posted a 1-year low. Strength in the dollar Wednesday weighed on the euro.  Also, comments from ECB Governing Council member Nagel undercut the euro when he said President-elect Trump's tariff plans could cost Germany 1% of GDP and could cause economic contraction.  On Wednesday, the euro initially moved higher as the dollar weakened temporarily due to a benign US Oct CPI report.  The euro also garnered support on hawkish comments from ECB Governing Council member Nagel, who said that core inflation is still quite high and there are still noticeable price pressures, especially in services.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 23% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Wednesday rose by +0.61%.  The yen Wednesday gave up overnight gains and fell to a 3-1/2 month low against the dollar on speculation President-elect Trump’s policies will boost inflation and keep the Fed from aggressively cutting interest rates.  Losses in the yen accelerated after T-note yields rebounded from an early decline and moved higher.

The yen on Wednesday initially moved higher on the stronger-than-expected Japan Oct PPI report, a hawkish factor for BOJ policy.  Also, Wednesday’s jump in the 10-year JGB bond yield to a 3-1/4 month high of 1.054% supported the yen.

Japan's Oct PPI rose +0.2% m/m and +3.4% y/y, stronger than expectations of unch m/m and +2.9% y/y, with the +3.4% y/y gain the largest year-on-year increase in 14 months.

December gold (GCZ24) Wednesday closed down -19.80 (-0.76%), and December silver (SIZ24) closed down -0.096 (-0.31%).  Precious metals Wednesday gave up an early advance and turned lower, with gold falling to a 1-3/4 month low.  Precious metals fell Wednesday after the dollar index rebounded from early losses and rallied to a 1-year high.  Precious metals Wednesday also fell on hawkish comments from ECB Governing Council member Nagel, who said core inflation is still quite high and there are still noticeable price pressures, especially in services.  In addition, today’s stronger-than-expected Japan Oct PPI report is hawkish for BOJ policy and may prompt the BOJ to raise interest rates at next month’s policy meeting.  Silver has some negative carryover from Wednesday’s slide in copper prices to a 2-month low.

Precious metals Wednesday initially moved higher and found support on a benign US Oct CPI report, a dovish factor for Fed policy.  Demand for gold as a hedge against inflation may remain strong in the near term on the likelihood that Republicans gain control of the House and Senate, which will make it easier for the Trump administration to push through its lower tax, higher tariff, and looser regulation policies, which could revive inflation.  In addition, the ongoing hostilities in the Middle East continue to boost safe-haven demand for precious metals.