Dollar Climbs and Gold Falls on Hawkish US Economic News

The dollar index (DXY00) today is up by +0.04% and posted a new 1-year high. Today’s strength in US economic news may keep the Fed from aggressively cutting interest rates and is positive for the dollar. Weekly jobless claims fell to a 5-1/2 month low, and Oct PPI rose more than expected, hawkish factors for Fed policy. The dollar fell back from its best level today after T-note yields gave up an early advance and turned lower, weakening the dollar’s interest rate differentials. 

US weekly initial unemployment claims fell -4,000 to a 5-1/2 month low of 217,000, showing a stronger labor market than expectations of 220,000.

US Oct PPI final demand rose +2.4% y/y, stronger than expectations of +2.3% y/y.  Oct PPI ex-food and energy rose +3.1% y/y, stronger than expectations of +3.0% y/y.

The markets are discounting the chances at 76% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) today recovered from a 13-month low and is up by +0.07%.  Short-covering emerged in the euro today as a decline in T-note yields took the dollar off its best levels and pushed EUR/USD higher. 

The euro today initially moved lower after Eurozone Sep industrial production posted its biggest decline in 8 months.  Also, comments from ECB Vice President Guindos put pressure on the euro when he said the economic recovery in the Eurozone was weaker than expected.  In addition, the dovish minutes of the Oct 16-17 ECB meeting were negative for the euro.

Eurozone Sep industrial production fell -2.0% m/m, weaker than expectations of -1.4% m/m and the biggest decline in 8 months.

ECB Vice President Guindos said the economic "recovery we were anticipating in the Eurozone is not happening with the intensity we expected."

The account of the ECB's Oct 16-17 meeting was seen as dovish as policymakers see inflation continuing to decline, saying "there was wide agreement that the incoming data since the September meeting had increased confidence in an ongoing disinflation process and that inflation would converge to the medium-term target."

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 26% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) today is up by +0.304%.  The yen today extended this week’s losses and slid to a new 3-1/2 month low against the dollar.  The yen is under pressure on concern that a clean sweep by Republicans in this year’s presidential and legislative elections will allow for the passage of President-elect Trump’s policies that could boost inflation and keep the Fed from aggressively cutting interest rates, thus supporting the dollar.  The yen rebounded from its worst levels after a decline in T-note yields sparked some short-covering in the yen. 

December gold (GCZ24) today is down -11.20 (-0.43%), and December silver (SIZ24) is down -0.193 (-0.65%).  Precious metals today are under pressure, with gold and silver falling to 2-month lows.  Todays’ rally in the dollar index to a 1-year high is fueling long liquidation in precious metals.  Also, todays’ US economic news that showed weekly jobless claims falling to a 5-1/2 month low and October producer prices rising more than expected is hawkish for Fed policy and negative for precious metals.  Silver prices also fell after Eurozone Sep industrial production posted its biggest decline in 8 months, a bearish factor for industrial metals demand.

Precious metals recovered from their worst levels today after T-note yields turned lower.  Demand for gold as a hedge against inflation may remain strong in the near term after Republicans gained 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 that could revive inflation.  In addition, the ongoing hostilities in the Middle East continue to boost safe-haven demand for precious metals.