The dollar index (DXY00) Monday rose by +0.23% and posted a new 2-year high. The dollar on Monday had carryover support from last Friday’s stronger-than-expected US Dec payroll report that reduced the chances of Fed rate cuts. Also, higher bond yields on Monday strengthened the dollar’s interest rate differentials as the 10-year T-note yield rose to a 14-month high. The dollar fell back from its best levels after stocks recovered from early sharp losses, which reduced liquidity demand for the dollar.
The markets are discounting the chances at 3% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Monday fell by -0.29% and posted a fresh 2-year low. Dollar strength Monday weighed on the euro as last Friday’s stronger-than-expected US Dec payroll report dampened the outlook for Fed interest rate cuts and is boosting the dollar. Also, dovish ECB comments Monday undercut the euro after ECB Governing Council member Rehn said more ECB interest rate cuts are needed. Losses in the euro were contained after the 10-year German bund yield rose to a 6-1/4 month high, which strengthened the euro’s interest rate differentials.
ECB Governing Council member Rehn said, “Against the backdrop of disinflation being on track and the growth outlook having weakened, it makes sense for the ECB to continue rate cuts.”
Swaps are discounting the chances at 95% for a -25 bp rate cut by the ECB at its next meeting on January 30.
USD/JPY (^USDJPY) Monday rose by +0.02%. On Monday, the yen gave up an early advance and was little changed after the stocks recovered, which curbed safe-haven demand for the yen. Higher T-note yields on Monday also weighed on the yen. Trading activity in the yen on Monday was well below normal, with markets in Japan closed for the Coming-of-Age Day holiday.
February gold (GCG25) Monday closed down -36.40 (-1.34%), and March silver (SIH25) closed down -1.005 (-3.21%). Precious metals were under pressure on Monday due to a stronger dollar, as the dollar index rallied to a 2-year high. Higher global bond yields on Monday were also bearish for precious metals. In addition, precious metals have had some negative carryover from last Friday’s stronger-than-expected US December payroll report, which reduced the chances of additional Fed interest rate cuts. Losses in precious metals accelerated Monday after stocks recovered from sharp losses, which curbed safe-haven demand for precious metals.
Gold prices had some support Monday after dovish central bank comments boosted demand for gold as an inflation hedge when ECB Governing Council member Rehn said additional ECB interest rate cuts are needed. Precious metals also 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. A supportive factor for silver prices Monday was the better-than-expected Chinese trade news as China Dec exports rose +10.7% y/y, stronger than expectations of +7.5% y/y and a bullish factor for industrial metals demand.
