The dollar index (DXY00) Wednesday fell by -0.16%. The dollar posted moderate losses Wednesday as T-note yields fell on the Fed-friendly US Dec CPI report that showed an unexpected easing of core inflation. Also, Wednesday’s report showed that the US Jan Empire manufacturing survey of general business conditions unexpectedly fell to an 8-month low, which is bearish for the dollar. In addition, Wednesday’s sharp rally in stocks reduced liquidity demand for the dollar.
However, short covering emerged in the dollar based on hawkish comments from New York Fed President Williams and Richmond Fed President Barkin, who said it would take more time for inflation to fall to the Fed’s target, signaling tighter Fed policy. The dollar also garnered support from the Fed Beige Book, which said economic activity increased “slightly to moderately” across the US.
The US Dec CPI rose to +2.9% y/y from +2.7% y/y in Nov, right on expectations. Dec CPI ex-food and energy unexpectedly eased to +3.2% y/y +3.3% y/y in Nov, better than expectations of no change at +3.3% y/y.
The US Jan Empire manufacturing survey general business conditions unexpectedly fell -14.7 to an 8-month low of -12.6, weaker than expectations of an increase to 3.0.
The Fed Beige Book stated that data gathered on or before January 6 showed economic activity increased “slightly to moderately” across the US in late November and December, supported by strong holiday sales.
Wednesday’s hawkish Fed comments were supportive of the dollar. New York Fed President Williams said, “The process of disinflation remains in train. But we are still not at our 2% goal, and it will take more time until we can achieve that on a sustained basis.” Also, Richmond Fed President Barkin said demand in the US economy is solid, and the Fed should remain restrictive to return inflation to 2%.
The markets are discounting the chances at 3% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Wednesday rose by +0.14%. The euro rose moderately Wednesday after the dollar tumbled on a weaker-than-expected US Dec CPI report. The euro also found support in Wednesday’s news, which showed that the Eurozone Nov industrial production rose as expected. Gains in the euro were limited due to dovish comments from ECB Vice President Guindos, who said he expects the ECB to keep easing its monetary policy.
Eurozone Nov industrial production rose +0.2% m/m, which is right on expectations.
ECB Vice President Guindos said, “We expect to continue to further reduce the restrictiveness of monetary policy as the latest information suggests that the economy is losing momentum.”
Swaps are discounting the chances at 99% for a -25 bp rate cut by the ECB at its next meeting on January 30.
USD/JPY (^USDJPY) Wednesday fell by -0.95%. The yen rallied to a 3-1/2 week high against the dollar Wednesday after comments from BOJ Governor Ueda bolstered speculation the BOJ will raise interest rates next week. The yen also garnered support from Wednesday’s Japanese economic news, which showed that Dec machine tool orders rose by the most in 2-1/2 years. Gains in the yen accelerated Wednesday when the dollar and T-note yields tumbled on the Fed-friendly US Dec CPI report.
Japan Dec machine tool orders rose +11.2% y/y, the largest increase in 2-1/2 years.
BOJ Governor Ueda said he heard encouraging views of rising confidence over wage increases and “we will raise interest rates if improvement continues in the economy and prices.”
February gold (GCG25) Wednesday closed up +35.50 (+1.32%), and March silver (SIH25) closed up +1.180 (+3.89%). Precious metals on Wednesday rallied sharply due to a weaker dollar and lower global bond yields. Gains in precious metals accelerated Wednesday after the UK and US December core consumer prices rose less than expected, which may prompt the BOE and Fed to cut interest rates. Gold also found support Wednesday as a store of value based on dovish comments from ECB Vice President Guindos, who said he expects the ECB to keep easing monetary policy. Precious metals have continued safe-haven support from geopolitical risks after the recent collapse of the Syrian government, Middle East tensions, and the escalation of hostilities in the Ukraine-Russia conflict. Silver prices also garnered carryover support Wednesday from a rally in copper prices to a 2-1/4 month high.
