Dollar Rallies as the British Pound and Euro Slide

The dollar index (DXY00) Wednesday rose by +0.32% and posted a 2-1/4 month high. Wednesday’s weaker-than-expected UK September consumer price report was dovish for BOE policy and undercut the British pound (^GBPUSD) to benefit the dollar.  The dollar also found support on weakness in the euro ahead of an expected 25 bp rate cut by the ECB on Thursday.  In addition, Wednesday’s stronger-than-expected US Sep import price index ex-petroleum report was a hawkish factor for Fed policy and supportive of the dollar.  Lower T-note yields and strength in stocks on Wednesday limited the upside in the dollar.

The US Sep import price index ex-petroleum rose +0.2% m/m, stronger than expectations of +0.1% m/m.

The markets are discounting the chances at 95% 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) Wednesday fell by -0.36% and posted a 2-1/2 month low. Wednesday’s dollar strength weighed on the euro.  The euro is also under pressure on expectations that the ECB will cut interest rates by 25 bp at Thursday’s policy meeting. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 98% for the October 17 meeting and 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Wednesday rose by +0.40%.  The yen was under pressure on Wednesday due to dovish comments from BOJ Board member Adachi, who said the BOJ should take a slow approach to raising interest rates.  The yen also declined after Japan Aug core machine orders unexpectedly declined, a dovish factor for BOJ policy.  Lower T-note yields Wednesday limited losses in the yen.

Japan Aug core machine orders unexpectedly fell -1.9% m/m, weaker than expectations of +0.1% m/m.

BOJ Board member Adachi said, "What we need to be careful of, in a gradual rate hike process, is that we raise it extremely gradually while keeping financial conditions accommodative" until the price trend gets to 2%.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 3% for the October 30-31 meeting and at 28% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) Wednesday closed up +12.40 (+0.46%), and December silver (SIZ24) closed up +0.218 (+0.69%).  Precious metals on Wednesday settled moderately higher, with gold posting a 2-1/2 week high and silver posting a 1-week high.  Wednesday’s slide in global bond yields was bullish for precious metals.  Gold also found demand as a store of value Wednesday on dovish comments from BOJ Board member Adachi, who said the BOJ should take a slow approach to raising interest rates. In addition, heightened tensions in the Middle East continue to boost safe-haven demand for precious metals. 

Wednesday’s rally in the dollar index to a 2-1/4 month high contained the upside in precious metals prices. Also, Wednesday’s report showed an unexpected decline in Japan’s August core machine orders, which was negative for industrial metals demand and bearish for silver prices.

More Precious Metal News from Barchart

• Stocks Mostly Higher on Strong Corporate Earnings Results
• Dollar Gains on British Pound Weakness
• Stocks Mixed on Chip Stock Weakness
• Dollar Posts Modest Losses as T-Note Yields Fall

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.