The Dollar Index (DXY00) rose +0.27% on Friday to hit a new 2.75-month high. Friday’s hawkish comments from Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack supported the dollar as they cited reasons to oppose the Fed’s rate cuts. The dollar also rose after the October Chicago MNI PMI rose more than expected. The dollar has some remaining support from Wednesday thanks to hawkish comments from Federal Reserve Chair Powell, who said a rate cut at the December FOMC meeting “is not a foregone conclusion.” The dollar’s gains were limited as Friday’s stock market rally dampened liquidity demand for the dollar.
The dollar remains under pressure from the current US government shutdown. The longer the shutdown continues, the more likely the U.S. economy will suffer and the more likely the Federal Reserve will have to cut interest rates.
US October Chicago MNI PMI rose +3.2 to 43.8, stronger than expectations of 42.3.
Kansas City Fed President Jeff Schmid said he voted against the Fed’s 25 basis point interest rate cut on Wednesday because “the labor market is largely balanced, the economy is showing continued momentum and inflation remains too high.”
Dallas Fed President Lorie Logan said: “I didn’t see the need to cut rates this week, and I would find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more quickly.”
Cleveland Fed President Beth Hammack said she “would have preferred to keep the interest rate steady at Wednesday’s FOMC meeting, as we need to maintain some amount of tightening to help bring inflation back down to target.”
Markets are pricing in a 63% chance that the FOMC will reduce the fed funds target range by 25 bps at the next FOMC meeting on December 9-10. Markets are pricing in an 82bp across-the-board interest rate cut by the end of 2026 to 3.06% from the current effective federal funds rate of 3.88%.
EUR/USD (^EURUSD) fell to a 2.75-month low on Friday and ended down -0.33%. The strength of the dollar on Friday weighed on the euro. Friday’s eurozone economic news supported the euro after the eurozone October core CPI and September German retail sales rose more than expected.
Central bank divergence also supports the euro as the ECB is seen as having ended its rate cutting cycle, while the Federal Reserve is expected to cut rates by at least another percentage point by the end of 2026.
Eurozone October CPI fell to +2.1% year-on-year from +2.2% year-on-year in September, right in line with expectations. October Core CPI was unchanged from September at +2.4% YoY, stronger than expectations of +2.3% YoY.
September German Retail Sales rose +0.2% MoM and +2.8% YoY, slightly stronger than expectations of +0.2% MoM and +2.7% YoY.
Swaps are pricing in a 4% chance that the ECB will cut rates by -25 basis points at the December 18 policy meeting.
USD/JPY (^USDJPY) fell -0.03% on Friday. The yen posted modest gains on Friday as it consolidated just above Thursday’s 8.5-month low against the dollar. Friday’s better-than-expected Japanese economic news on September industrial production and October Tokyo CPI is bullish for BOJ policy and supportive of the yen. Japan’s weaker-than-expected September retail sales report capped the yen’s gains.
Japan’s industrial production in September rose +2.2% mom, stronger than expectations of +1.5% mom and the largest increase in seven months.
Japan retail sales in September rose +0.3% m/m, below expectations of +0.8% m/m.
Japan’s October Tokyo CPI rose +2.8% YoY, stronger than expectations of +2.4% YoY. October Tokyo CPI excluding fresh food and energy rose +2.8% year-on-year, stronger than expectations of +2.6% year-on-year.
December COMEX Gold (GCZ25) closed Friday down -19.40 (-0.48%) and December COMEX Silver (SIZ25) closed down -0.456 (-0.94%).
Precious metal prices gave up their advance early on Friday and stabilized lower, with silver falling from a one-week high. Friday’s rally in the dollar index to a 2.75-month high sparked long liquidations in precious metals. Additionally, the Fed’s hawkish comments on Friday weighed on precious metals prices after Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack cited reasons for opposing the Fed’s rate cuts. Additionally, easing trade tensions between the United States and China has reduced safe-haven demand for precious metals. Silver prices were also pressured today by signs of weakness in China’s industrial metals demand after China’s October manufacturing PMI fell more than expected and contracted the most in 6 months.
Gold prices initially rose on Friday on carryover support from Thursday on signs of increased gold buying by central banks, following the World Gold Council’s report that global central banks bought 220 MT of gold in the third quarter, up 28% from the second.
Precious metals have underlying support as a safe haven due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying and political pressure on the independence of the Federal Reserve. Additionally, recent weaker-than-expected US economic news has bolstered prospects for the Federal Reserve to continue cutting interest rates, a bullish factor for precious metals.
Since hitting record highs earlier this month, long-term sell-off pressures have weighed on precious metals prices. Additionally, this week’s rally in the S&P 500 to a new record has dampened safe-haven demand for precious metals and led to sharp long-term sell-offs and ETF outflows. Gold ETF holdings have fallen from last Tuesday’s 3-year high, and silver ETF holdings have fallen from last Tuesday’s 3.25-year high.
China’s October Manufacturing PMI fell -0.8 to 49.0, weaker than expectations of 49.6 and the sharpest pace of contraction in 6 months.
On the date of publication, Rich Asplund had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
