The dollar index (DXY00) Tuesday fell by -1.20%. The dollar fell sharply Tuesday after President Trump refrained from imposing new tariffs on Asian and European goods on his first day in office, which eases inflation concerns and may allow the Fed to keep cutting interest rates. Also, Tuesday’s decline in T-note yields weakened the dollar’s interest rate differentials and weighed on the dollar. In addition, Tuesday’s stock rally curbed liquidity demand for the dollar.
The markets are discounting the chances at 1% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Tuesday rose by +0.02% and eked out a 2-week high. The euro recovered from early losses Tuesday and moved slightly higher as the dollar sank when President Trump refrained from imposing tariffs on Chinese or European goods. The euro also found support from Tuesday’s news that showed Eurozone Dec new car registrations posted their largest increase in 8 months.
The euro Tuesday initially fell on dovish ECB comments after ECB Governing Council members Villeroy de Galhau and Kazimir said there is a chance the ECB will continue cutting interest rates this year. Also, weakness in German business sentiment undercut the euro after Tuesday’s news showed that the German Jan ZEW survey expectations of economic growth fell more than expected.
Eurozone Dec new car registrations rose +5.1% y/y to 911,000 units, the biggest increase in 8 months.
The German Jan ZEW survey expectations of economic growth fell -4.4 to 10.3, weaker than expectations of 15.1.
ECB Governing Council member Villeroy de Galhau said, “There’s a plausible consensus” that the ECB will lower interest rates at each of its upcoming meetings.
ECB Governing Council member Kazimir said a reduction in interest rates by the ECB next week is all but certain, and two to three more will probably follow.
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) Tuesday fell by -0.03%. The yen Tuesday climbed to a 1-month high against the dollar after President Trump so far refrained from imposing new tariffs on Asian goods, which bolsters expectations for the BOJ to raise interest rates following Friday’s 2-day policy meeting. The yen also gained Tuesday after Kyodo News reported that the BOJ will likely raise interest rates at the week’s policy meeting. In addition, Tuesday’s decline in T-note yields is bullish for the yen. Gains in the yen were limited after the 10-year JGB bond yield matched a 1-1/2 week low Tuesday of 1.178%, which weakened the yen’s interest rate differentials.
February gold (GCG25) Tuesday closed up +10.50 (+0.38%), and March silver (SIH25) closed up +0.355 (+1.14%). Precious metals Tuesday settled moderately higher. Tuesday’s weaker dollar was supportive of precious metals prices. Also, Tuesday’s decline in global bond yields was bullish for precious metals. In addition, dovish central bank comments Tuesday supported precious metals as a store of value after ECB Governing Council members Villeroy de Galhau and Kazimir said they expect the ECB to keep lowering interest rates this year. Silver prices also garnered support Tuesday after President Trump refrained from imposing new tariffs on Chinese goods, supporting global economic growth prospects and industrial metals demand.
Gains in gold prices were limited Tuesday by reduced safe-haven demand after President Trump refrained from imposing new tariffs on Chinese and European goods on his first day in office. Also, a decline in inflation expectations reduced demand for gold as an inflation hedge after the US 10-year breakeven inflation rate fell to a 1-1/2 week low Tuesday. In addition, Tuesday’s stock rally curbed safe-haven demand for precious metals.
