Dollar Gains on US Economic Strength and Hawkish Fed

The dollar index (DXY00) rallied to a 1-week high today and finished up by +0.71%.  The dollar jumped Friday on the stronger-than-expected US Oct payroll report, which showed payrolls and hourly earnings rose more than expected and the unemployment rate unexpectedly declined, hawkish factors for Fed policy. Also, the University of Michigan US Nov consumer sentiment index rose more than expected, a positive factor for the dollar.  In addition, hawkish Fed comments on Friday boosted the dollar after New York Fed President Williams said that inflation is "absolutely too high," and San Francisco Fed President May Daly said, "My expectation is we're going to have to tighten monetary policy further."  

US Oct nonfarm payrolls rose +165,000, stronger than expectations of +70,000 and the biggest increase in 7 months.  Also, Sep nonfarm payrolls were revised upward to +60,000 from the previously reported +29,000.  The Oct unemployment rate unexpectedly fell -0.1 to 4.1% versus expectations of no change at 4.2%.

US Oct average hourly earnings rose +0.4% m/m and +3.1% y/y, stronger than expectations of +0.3% m/m and +2.9% y/y.

The University of Michigan US Nov consumer sentiment index rose +3.0 to 51.0, stronger than expectations of no change at 48.0.

The University of Michigan US Nov 1-year inflation expectations fell -0.4 to 4.3%, weaker than expectations of 4.6%.  The Nov 5-10 year inflation expectations fell -0.1 to 3.4%, weaker than expectations of no change at 3.5%.

New York Fed President Williams said that inflation is "absolutely too high" and monetary policy "does have a critical role in making sure that these relative price shocks don't translate into broader or more persistent inflation." 

San Francisco Fed President May Daly said inflation has been high for too long and "My expectation is we're going to have to tighten monetary policy further," but it is still too soon to know how much higher rates will need to go. 

The markets are now pricing in a 78% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9. 

EUR/USD (^EURUSD) fell to a 1-week low on Friday and finished down by -0.71%.  The euro retreated on Friday on weaker-than-expected Eurozone economic news after Eurozone Sep retail sales fell more than expected.  Euro losses accelerated Friday after the dollar jumped on the stronger-than-expected US Oct payroll report.  On the positive side for the euro was Friday’s report that showed an unexpected increase in German Sep industrial production.

Eurozone Sep retail sales fell -0.7% m/m, weaker than expectations of -0.1% m/m.

German Sep industrial production unexpectedly rose +0.7% m/m, stronger than expectations of -0.1% m/m.

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) rose by +0.53% on Friday.  The yen moved lower Friday on lower Japanese government bond yields after the 10-year JGB yield fell to a 4.5-month low of 2.612% Friday, weakening the yen’s interest rate differentials.  Yen losses accelerated Friday after the dollar and T-note yields jumped on the stronger-than-expected US Oct payroll report.  The yen found limited support Friday after Japan’s Sep real cash earnings rose more than expected, a hawkish factor for BOJ policy.   

The market is pricing in a 53% chance of a +25 bp BOJ rate hike at its next meeting on December 18.

December COMEX gold (GCZ26) closed down -38.60 (-0.94%) on Friday, and December COMEX silver (SIZ26) closed down -0.434 (-0.83%).

Precious metals settled lower on Friday, pressured by a stronger dollar.  Also, Friday’s stronger-than-expected US Oct payroll report is hawkish for Fed policy and bearish for precious metals.  In addition, hawkish Fed comments Friday weighed on precious metals after New York Fed President Williams said that inflation is "absolutely too high," and San Francisco Fed President May Daly said inflation has been high for too long and "My expectation is we're going to have to tighten monetary policy further."   Finally, Friday’s stock recovery has curbed 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 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.