The dollar index (DXY00) Friday fell by -0.42%. The dollar fell back from Thursday’s 2-year high as strength in stocks on Friday reduced liquidity demand for the dollar. Losses in the dollar accelerated due to dovish comments from Richmond Fed President Barkin, who said the Fed doesn’t need to be as restrictive as it once thought. On the positive side for the dollar was the rise in T-note yields on the stronger-than-expected US Dec ISM manufacturing index, a hawkish factor for Fed policy.
The US Dec ISM manufacturing index unexpectedly rose +0.9 to a 9-month high of 49.3, stronger than expectations of a decline to 48.2.
Richmond Fed President Barkin said, “Inflation is not yet back to target, so we still have more work to do, but we don’t think we need to be as restrictive as we once were to finish that job.”
The markets are discounting the chances at 11% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Friday rose by +0.41%. Friday’s weakness in the dollar sparked some short covering in the euro as it recovered slightly from Thursday’s 2-year low. Stronger-than-expected German labor market news Friday also gave the euro a boost.
The German Dec unemployment change rose by +10,000, showing a stronger labor market than expectations of +15,000. The Dec unemployment rate remained steady at 6.1%, better than expectations of an increase to 6.2%.
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 7% for a -50 bp rate cut at that meeting.
USD/JPY (^USDJPY) Friday fell by -0.22%. The yen strengthened Friday on speculation that the BOJ will raise interest rates at this month’s policy meeting. However, gains in the yen were limited Friday after T-note yields erased an early decline and moved higher on the stronger-than-expected US Dec ISM manufacturing report. Trading activity in the yen was below average, with markets in Japan closed Friday for a bank holiday.
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) Friday closed down -14.30 (-0.54%), and March silver (SIH25) closed up +0.165 (+0.55%). Precious metals Friday settled mixed. Gold prices fell back from a 2-1/2 week high Friday and posted moderate losses on reduced safe-haven demand as stocks rallied. Also, Friday’s stronger-than-expected US Dec ISM manufacturing report pushed T-note yields higher and weighed on gold prices.
Friday’s weaker dollar was supportive of metals prices. Also, expectations that the Fed and ECB will keep cutting interest rates are boosting demand for gold as a store of value. 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 Friday on the stronger-than-expected US Dec ISM manufacturing report and better-than-expected German labor market news, bullish factors for industrial metals demand.
