Dollar Slips on Weak US Economic News

The dollar index (DXY00) fell by -0.05% on Friday.  A weaker-than-expected US Sep payroll report on Friday weighed on the dollar.  Both non-farm payrolls and average hourly earnings rose less than expected, reducing the chance of a Fed rate hike later this month.  Friday’s -1% decline in WTI crude oil prices lowered inflation expectations and could persuade the Fed to loosen monetary policy, a bearish factor for the dollar. The dollar was also pressured by the weaker-than-expected US Aug factory orders report.

However, the dollar recovered from its worst level on Friday after T-note yields erased an early decline and moved higher.  Also, hawkish comments from Dallas Fed President Lorie Logan supported the dollar when she said the Fed may need to raise interest rates by at least another 50 bp to cool inflation. 

US Sep nonfarm payrolls rose by +29,000, weaker than expectations of +90,000, and Aug payrolls were revised lower to +133,000 from the originally reported +162,000.  The Sep unemployment rate unexpectedly rose +0.1 to 4.2%, showing a weaker labor market than expectations of no change at 4.1%.

US Sep average hourly earnings rose +0.1% m/m and +3.0% y/y, weaker than expectations of +0.3% m/m and +3.1% y/y.

US Aug factory orders rose +0.1% m/m, weaker than expectations of +0.2% m/m, and Aug factory orders ex-transportation rose +0.3% m/m, weaker than expectations of +0.6% m/m.

Thursday evening, Dallas Fed President Lorie Logan said: "I currently estimate the fed funds target range needs to rise an additional 50 bp or more to appropriately balance the outlook and risks for our dual mandate goals."

Markets are pricing in a 23% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) rose by +0.07% on Friday.  The euro found support Friday from the stronger-than-expected Eurozone Sep CPI report, a hawkish factor for ECB policy.  Also, Friday’s -1% fall in crude oil prices is positive for the Eurozone economy and the euro, as Europe imports most of its energy. The euro remained higher on Friday after the dollar fell on the weaker-than-expected US Sep payroll report.  

Gains in the euro were limited on Friday on heightened fiscal and political risks in France.  The French government unveiled plans to narrow the budget deficit that must be adopted by the end of December to avoid relying on emergency legislation.  France’s debt burden is projected to top 120% of GDP next year.

Eurozone Sep CPI rose +3.8% y/y, stronger than expectations of +3.7% y/y and the fastest pace of increase in 3 years.  Sep core CPI rose +2.5% y/y, right on expectations.

The markets are discounting a 14% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell by -0.17% on Friday.  The yen moved higher Friday on the stronger-than-expected Tokyo Sep CPI report, a hawkish factor for BOJ policy.  Also, Friday’s -1% decline in crude oil prices is positive for the Japanese economy and the yen, as Japan imports more than 90% of its energy. The yen remained higher on Friday after the dollar fell on the weaker-than-expected US Sep payroll report.

The yen also has carryover support from Monday, when Reuters reported that Japan's top currency official, Atsushi Mimura, said that Japan's prime minister and finance minister, along with the US, have recently sent a "very clear" message about the yen's depreciation. His comments have bolstered speculation that Japanese authorities may be preparing another joint intervention with the US to support the yen.

Japan's Aug jobless rate unexpectedly rose +0.1 % to 2.5%, showing a weaker labor market than expected at 2.4%.

The Japan Sep Tokyo CPI rose +2.7% y/y, stronger than expectations of +2.5% y/y and the fastest pace of increase in 10 months.  Sep Tokyo CPI ex-fresh food and energy rose +3.0% y/y, stronger than expectations of +2.5% y/y and the fastest pace of increase in 13 months.

Markets are pricing in a 14% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed down -40.00 (-0.95%) on Friday, and December COMEX silver (SIZ26) closed down -0.760 (-1.24%).

Precious metals erased an early rally on Friday and sold off, with silver falling to a 2-month low. Rising bond yields on Friday sparked selling in precious metals on concerns the Fed will continue to raise interest rates even after Friday’s weaker-than-expected US payroll report.  Precious metals were also pressured Friday by hawkish comments from Dallas Fed President Lorie Logan, who said the Fed may need to raise interest rates by at least another 50 bp to cool inflation.  In addition, Friday’s stock strength reduced safe-haven demand for precious metals. 

Precious metals initially moved higher on Friday after the weaker-than-expected US Sep payroll report knocked the dollar lower and reduced the chance of a Fed rate hike at this month’s FOMC meeting, bullish factors for precious metals.  Also, Friday’s -1% fall in crude oil prices lowers inflation expectations and could prompt the world’s central banks to loosen monetary policy, which supports precious metals. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Friday.  Long holdings in silver ETFs rose to a 6-month high on Wednesday.

Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second 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.