The dollar index (DXY00) Thursday rose by +0.79% to a new 2-year high. Signs of strength in the US economy boosted the dollar Thursday after weekly jobless claims unexpectedly fell to an 8-month low and after the US Dec S&P manufacturing PMI was revised higher. Also, weakness in the euro is boosting the dollar as EUR/USD fell to a 2-year low Thursday on fears that Europe’s export-orientated economies will be hit hard by US trade tariffs from the incoming Trump administration. The dollar added to its gains today on increased liquidity demand after stocks gave up early gains and moved lower.
US weekly initial unemployment claims unexpectedly fell -9,000 to an 8-month low of 211,000, showing a stronger labor market than expectations of an increase to 221,000.
The US Dec S&P manufacturing PMI was revised upward by +1.1 to 49.4 from the previously reported 48.3.
US Nov construction spending was unchanged m/m, weaker than expectations of +0.3% m/m.
The markets are discounting the chances at 11% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Thursday fell by -0.94% and posted a fresh 2-year low. The euro came under pressure today after the Eurozone Dec S&P manufacturing PMI was revised lower. Also, today’s dollar strength is undercutting the euro. In addition, central bank divergence is also weighing on the euro due to speculation that the ECB will lower interest rates more aggressively than the Fed.
The Eurozone Dec S&P manufacturing PMI was revised downward by -0.1 to 45.1 from the previously reported 45.2.
Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its next meeting on January 30 and at 11% for a -50 bp rate cut at that meeting.
USD/JPY (^USDJPY) Thursday rose by +0.24%. The yen on Thursday gave up an early advance and turned lower as the dollar strengthened on better-than-expected US economic news. The yen added to its losses after T-note yields rebounded from an early slide and were little changed. Trading activity in the yen is below average, with markets in Japan closing for the rest of this week for the New Year’s Day holiday.
The yen is supported by speculation that the BOJ will raise interest rates at this month’s policy meeting. The yen also has support from the threat of intervention in the forex market by the Japanese government to support the yen. Last Friday, Japanese Finance Minister Kato said the government would take “appropriate” steps against excessive foreign exchange market movements after the yen tumbled to a 5-1/2 month low against the dollar last Thursday.
February gold (GCG25) Thursday closed up +28.00 (+1.06%), and March silver (SIH25) closed up +0.658 (+2.25%). Precious metals on Thursday posted moderate gains, with gold climbing to a 2-week high. Expectations that the Fed and ECB will keep cutting interest rates are boosting demand for gold as a store of value. Also, Thursday’s stock slide boosted some safe-haven demand for precious metals. In addition, precious metals have continued safe-haven support from geopolitical risks after the recent collapse of the Syrian government and the escalation of hostilities in the Ukraine-Russia conflict. Silver garnered support Thursday from an upward revision to the US Dec S&P manufacturing PMI, a supportive factor for industrial metals demand.
Thursday’s rally in the dollar index to a 2-year high is bearish for metal prices. A negative factor for silver was Thursday’s economic news that showed China’s Dec Caixin manufacturing PMI unexpectedly fell -1.0 to 50.5, weaker than expectations of an increase to 51.7 and a bearish factor for Chinese industrial metals demand.
