Dollar Retreats as Democrats Retake Control of Congress

The dollar index (DXY00) tumbled to a 5-week low on Wednesday and finished down by -0.32%.  The dollar sank Wednesday after Democrats swept Congress in the US midterm elections, fueling concerns about political gridlock and tougher tech regulation that could curtail foreign demand for US assets.  Wednesday’s -8% plunge in WTI crude oil prices to a 4-week low and lower T-note yields also weighed on the dollar.  In addition, stock strength on Wednesday has curbed liquidity demand for the dollar.  The dollar recovered from its worst level after US employers added more jobs than expected in the Oct ADP employment report and as the US Sep trade deficit unexpectedly narrowed. 

The US Oct ADP employment change rose by +86,000, stronger than expectations of +67,000.

The US Sep trade deficit unexpectedly shrank to -$105.0 billion from -$105.7 billion in Aug, versus expectations of an increase to -$107.9 billion, a positive factor for Q3 GDP.

The US Oct ISM services index fell -0.4 to 54.5, weaker than expectations of 54.8.  The Oct ISM services prices paid sub-index unexpectedly fell -1.0 to 73.0 versus expectations of an increase to 74.6.

The markets are now pricing in an 80% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9. 

EUR/USD (^EURUSD) climbed to a 4-week high on Wednesday and finished up by +0.31%.  The euro rallied on Wednesday amid the slump in the dollar.  Also, Eurozone Oct CPI rose at the fastest pace in 3 years, a hawkish factor for ECB policy and supportive of the euro.  In addition, Wednesday’s plunge in crude oil prices to a 4-week low is supportive of the Eurozone economy and the euro, as Europe imports most of its energy.

The Eurozone Oct CPI rose +4.0% y/y, right on expectations and the fastest pace of increase in more than 3 years.  Oct core CPI rose +2.5% y/y, unchanged from Sep and right on expectations.

The Eurozone Oct S&P composite PMI was revised downward by -0.2 to 51.7 from the previously reported 51.9.

The markets are now pricing in a 79% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17. 

USD/JPY (^USDJPY) fell by -0.13% on Wednesday.  The yen rose Wednesday on the heels of a weaker dollar. Also, Wednesday’s slump in the Nikkei Stock Index to a 5.5-month low boosted safe-haven demand for the yen.  In addition, Wednesday’s -8% plunge in crude oil to a 4-week low supports Japan’s economy and the yen, as Japan imports more than 90% of its energy.  Finally, lower T-note yields on Wednesday were bullish for the yen.

The market is pricing in a 60% chance of a +25 bp BOJ rate hike at its next meeting on December 18.

December COMEX gold (GCZ26) closed up +132.60 (+3.37%) on Wednesday, and December COMEX silver (SIZ26) closed up +2.529 (+5.08%).

Precious metals prices soared on Wednesday after the dollar index tumbled to a 5-week low.  Also, the Democratic sweep of Congress in the US midterm elections could restrain President Trump’s fiscal agenda, which has knocked T-note yields lower and boosted precious metals prices.   In addition, Wednesday’s -8% plunge in crude oil prices to a 4-week low eased inflation expectations and could persuade the world’s central banks to ease monetary policy, a bullish factor for precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high on October 21, although those holdings have since backed off.  Long holdings in silver ETFs rose to a 7.75-month high on Tuesday.

Strong central bank demand for gold is supporting gold prices, after recent 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.  However, Russia’s central bank, the sixth-largest central-bank gold holder, said on October 20 that it reduced its gold reserves to a 7-year low of 72.8 million ounces as of October 1.

On the date of publication, Rich Asplund did not directly have a position 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.