Dollar Gains and Gold Slips on Hawkish Fed Comments

The dollar index (DXY00) Monday rose by +0.36% to a 2-month high.  Hawkish comments Monday from Fed Governor Waller and Minneapolis Fed President Kashkari were supportive of the dollar as they favor a slow pace to Fed rate cuts.  The dollar also rallied moderately on Monday on reduced Fed interest rate cut expectations after last week’s US consumer and producer price reports for September were stronger than expected.  In addition, weakness in the yen is boosting the dollar as the yen tumbled to a 2-1/4 month low Monday against the dollar.

Fed comments on Monday were supportive of the dollar as they signaled a gradual pace of interest rate cuts.  Minneapolis Fed President Kashkari said it appears likely that "further modest reductions" in the federal funds rate will be appropriate in coming quarters.  Also, Fed Governor Waller said recent data signals the US economy may not be slowing as much as desired, so policymakers can approach interest rate cuts "with less urgency" than they applied at last month's FOMC meeting.

The markets are discounting the chances at 87% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 0% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) on Monday fell by -0.30% and posted a 2-month low. The euro retreated on Monday due to the strength of the dollar.   Also, expectations that the ECB will cut interest rates by 25 bp at this Thursday’s policy meeting are weighing on the euro.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for the October 17 meeting and 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Monday rose by +0.41%.  The yen tumbled to a 2-1/4 month low Monday against the dollar.  Last week’s stronger-than-expected US consumer and producer price reports dampened speculation that the Fed will aggressively cut interest rates, which has boosted the dollar and weighed on the yen. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 2% for the October 30-31 meeting and at 26% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) Monday closed down -10.70 (-0.40%), and December silver (SIZ24) closed down -0.439 (-1.38%).  Precious metals on Monday settled moderately lower.  Monday’s rally in the dollar index to a 2-month high was bearish for metals.  Also, hawkish comments from Fed Governor Waller and Minneapolis Fed President Kashkari weighed on precious metals as they favored a slow approach to Fed rate cuts. In addition, Monday’s rally in stocks has reduced safe-haven demand for precious metals.  Silver prices are being undercut today by weaker-than-expected news on Chinese Sep exports and imports, a negative factor for global economic growth prospects and industrial metals demand. 

Losses in precious metals Monday were contained as heightened tensions in the Middle East boosted safe-haven demand for precious metals.  Also, expectations for the ECB to cut interest rates by 25 bp on Thursday are increasing demand for gold as a store of value.

Trade news from China was weaker than expected, a negative factor for global growth prospects and industrial metals demand.  China Sep exports rose +2.4% y/y, weaker than expectations of +6.0% y/y.  Also, Sep imports rose +0.3% y/y, weaker than expectations of +0.8% y/y.

More Forex News from Barchart

• Stocks Climb on Strength in Tech and Earnings Optimism
• Dollar Rallies to a 2-Month High on Reduced Fed Rate Cut Expectations
• S&P 500 Posts a Record High on Corporate Earnings Optimism
• Dollar Finishes Slightly Lower on Weak US News and Strength in Stocks

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.