Hawkish Fed Speak Lifts Bond Yields and the Dollar

The dollar index (DXY00) rallied to a new 1.5-year high on Friday and finished up +0.22%.  The dollar was supported by weakness in stocks on Friday, which boosted demand for dollar liquidity.  The dollar also rose amid higher T-note yields, after the 10-year T-note yield rose to a 4-week high of 5.172%, strengthening the dollar’s interest-rate differentials. The dollar also found support on hawkish Fed comments Friday from Chicago Fed President Austan Goolsbee, Boston Fed President Susan Collins, and San Francisco Fed President Mary Daly, who all said they favored additional Fed tightening.  Dollar gains were limited Friday after US Oct PPI rose less than expected.

US Oct PPI final demand rose +0.3% m/m and +6.5% y/y, weaker than expectations of +0.4% m/m and +6.6% y/y.  Oct PPI ex-food and energy rose +0.3% m/m and +5.0% y/y, right on expectations.

Chicago Fed President Austan Goolsbee said the Fed "has work to do" on inflation, as the AI build-out is heating up the economy on top of energy costs.

Boston Fed President Susan Collins said that tighter Fed monetary policy may be needed to cool prices.

San Francisco Fed President Mary Daly said the key problem in the US economy is inflation and "We're going to need to, in all likelihood, raise interest rates."

The markets are now pricing in a 100% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9. 

EUR/USD (^EURUSD) fell to a fresh 1.5-year low on Friday and finished down -0.28%.  The euro was under pressure Friday from a stronger dollar.  Losses in the euro were limited on Friday after Eurozone Q3 GDP was left unrevised. 

Eurozone Q3 GDP was left unrevised at +0.4% q/q and +1.3% y/y, as expected.

The markets are now pricing in a 92% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17. 

USD/JPY (^USDJPY) fell by -0.06% on Friday.  The yen recovered from a 2.25-month low against the dollar on Friday and posted modest gains.  Concerns that weakness in the yen past 160 per dollar could prompt intervention by Japanese authorities sparked some short covering in the yen on Friday.  Three times over the past few months, US and Japanese authorities intervened jointly in the forex market to support the yen when it rose above 160 per dollar.

The yen initially moved lower on Friday as T-note yields rose. Also, Friday’s rally in the Nikkei Stock Index to a 1-week high reduced safe-haven demand for the yen.

The market is pricing in an 84% chance of a +25 bp BOJ rate hike at its next meeting on December 18.

December COMEX gold (GCZ26) closed up +1.00 (+0.03%) on Friday, and December COMEX silver (SIZ26) closed down -0.944 (-1.89%).

Precious metals settled mixed on Friday, with silver falling to a 1.5-week low.  Friday’s rally in the dollar index to a 1.5-year high is bearish for metals. Also, hawkish Fed comments on Friday were negative for precious metals after Chicago Fed President Austan Goolsbee, Boston Fed President Susan Collins, and San Francisco Fed President Mary Daly all expressed their support for additional Fed interest rate hikes.  In addition, higher global government bond yields on Friday weighed on precious metals prices. 

Gold prices recovered from early losses on Friday and posted slight gains after US Oct producer prices rose less than expected, a dovish factor for Fed policy.  Gold prices also found safe-haven support on Friday after US Central Command said it shot down two attack drones launched by Iran’s IRGC toward a US base in Bahrain.  Weakness in stocks on Friday also boosted some safe-haven demand 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 last Tuesday.

Strong central bank demand for gold is supporting gold prices.  Recent World Gold Council data showed cumulative gold purchases by global central banks in Q3 were 321,000 MT, the most since Q4 of 2024.  Also, Sunday’s news showed that bullion held in China's PBOC reserves rose by 830,000 ounces to 78.30 million troy ounces in October, the largest increase in three years and the twenty-fourth consecutive month the PBOC boosted its gold reserves.

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.