The dollar index (DXY00) Monday fell by -0.64%. The dollar retreated Monday after the Washington Post reported that President-elect Trump's aides are weighing a tariff program covering only critical imports. If implemented, such a plan would disrupt global trade less than expected and reduce the inflationary impact of the tariffs, a dovish factor for Fed policy.
Also, Monday's US economic news was weaker than expected and bearish for the dollar. In addition, Monday's stock rally reduced liquidity demand for the dollar. However, hawkish comments from San Francisco Fed President Daly and Fed Governors Cook and Kugler were supportive of the dollar.
The US Dec S&P services PMI was revised downward by -1.7 to 56.8 from the previously reported 58.5.
US Nov factory orders fell -0.4% m/m, slightly weaker than expectations of -0.3% m/m, although Oct factory orders were revised upward to +0.5% m/m from the previously reported +0.2% m/m.
Hawkish Fed comments were supportive of the dollar. San Francisco Fed President Daly said despite significant progress in lowering price pressures over the past two years, inflation remains "uncomfortably above our target." Also, Fed Governor Kugler said, "US inflation is not at 2% yet, so we're definitely aiming still to get there, and we know the job is not done." In addition, Fed Governor Cook said, "Since September, the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time. Thus, I think we can afford to proceed more cautiously with further interest rate cuts."
The markets are discounting the chances at 7% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Monday rose by +0.79%. The euro Monday found after the dollar tumbled when the Washington Post reported that President-elect Trump's aides are scaling back tariff plans to cover only critical imports. Gains in the euro accelerated Monday when the 10-year German bund yield jumped to a 2-month high after German December consumer prices rose more than expected, a hawkish factor for ECB policy. Also, better-than-expected Eurozone economic news on the Dec S&P composite PMI and the Jan Sentix investor confidence index supported the euro.
The Eurozone Jan Sentix investor confidence index fell -0.2 to a 14-month low of -17.7, slightly stronger than expectations of -17.9.
The Eurozone Dec S&P composite PMI was revised upward by +0.1 to 49.6 from the previously reported 49.5.
German Dec CPI (EU harmonized) rose +0.7% m/m and +2.9% y/y, stronger than expectations of +0.5% m/m and +2.6% y/y with the +2.9% y/y gain the strongest year-on-year increase in 11 months.
Swaps are discounting the chances at 98% for a -25 bp rate cut by the ECB at its next meeting on January 30.
USD/JPY (^USDJPY) Monday rose by +0.16%. The yen on Monday gave up overnight gains and turned lower on strength in T-note yields. Also, the downward revision to the Japan Dec Jibun Bank services PMI was negative for the yen. The yen Monday initially moved higher based on hawkish comments from BOJ Governor Ueda, who said the BOJ would continue to raise interest rates if economic improvement continues. The dollar's weakness Monday also supported the yen on the prospects of smaller-than-expected US tariffs.
The Japan Dec Jibun Bank services PMI was revised downward by -0.5 to 50.9 from the previously reported 51.4.
BOJ Governor Ueda said, "Our stance is that we will raise the policy interest rate to adjust the degree of monetary easing if economic and price conditions keep improving."
February gold (GCG25) Monday closed down -7.30 (-0.27%), and March silver (SIH25) closed up +0.518 (+1.72%). Precious metals Monday settled mixed, with silver climbing to a 2-1/2 week high. Monday's decline in the dollar was bullish for metals prices. Precious metals also 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 Monday after the Washington Post reported that President-elect Trump's aides are weighing a plan for tariffs on only critical imports. If implemented, such a plan would disrupt global trade and economic growth less than expected, a supportive factor for industrial metals demand.
Gold prices retreated Monday after hawkish Fed comments pushed the 10-year T-note yield to an 8-month high. Fed Governor Cook said the Fed can afford to proceed more cautiously with further interest rate cuts, and San Francisco Fed President Daly said inflation remains "uncomfortably above our target." Also, Monday's rally in stocks reduced safe-haven demand for precious metals.
