Dollar Rallies on Higher Crude Oil Prices and Hawkish Fed Comments

The dollar index (DXY00) rallied to a 1.5-year high on Monday, finishing up +0.37%.  The dollar rallied on Monday amid stronger crude prices.  WTI crude rose more than +2% on Monday, raising inflation expectations that could prompt the Fed to tighten monetary policy and support the dollar.  The dollar raced to its high on Monday amid hawkish comments from Cleveland Fed President Beth Hammack, who said inflation pressures are broad-based, not concentrated, and that restrictive Fed policy is needed to reach 2% inflation. 

Markets are pricing in a 22% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) fell to a 17-month low on Monday and finished down by -0.39%.  Monday’s rally in the dollar index to a1.5-year high weighed on the euro. Also, dovish comments from ECB Governing Council member Yannis Stournaras weighed on the euro when he hinted that an ECB rate hike this month is less likely than one in December.  In addition, Monday’s +2% increase in crude oil prices is bearish for the Eurozone economy and the euro, as Europe imports most of its energy.

ECB Governing Council member Yannis Stournaras said the ECB may raise interest rates again to curb inflation but without rushing any action, suggesting an ECB rate hike this month is less likely than one in December. 

The markets are discounting a 12% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.23% on Monday.  The yen fell to a 2-week low against the dollar on Monday. Higher crude oil prices on Monday weighed on the yen after WTI crude rose more than +2%.  The higher crude prices are negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  Trading activity in the yen was below-normal, with Japanese markets closed on Monday for the Health Sports Day holiday.

Markets are pricing in a 9% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed down -25.70 (-0.61%) on Monday, and December COMEX silver (SIZ26) closed down -0.535 (-0.88%).

Precious metals prices settled lower on Monday, pressured by a rally in the dollar index ($DXY) to a 1.5-year high.  Also, Monday’s +2% jump in WTI crude oil raised inflation expectations that could prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high last Thursday.  Long holdings in silver ETFs rose to a 6.5-month high on September 22.

Strong central bank demand for gold is supporting gold prices, after last Thursday’s news showed that bullion held in China's PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third consecutive month the PBOC boosted its gold reserves.

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.