Dollar Weakens on Reduced Fed Rate Hike Chances This Month

The dollar index (DXY00) tumbled to a 2-week low on Friday and finished down by -0.19%.  The dollar came under pressure Friday after Fed Chair Powell refrained from providing guidance on monetary policy or the economy during a speech at the annual IMF meeting in Bangkok.  Mr. Powell’s lack of guidance reduced the chance of a Fed rate hike later this month to 13% from 27% on Thursday.  A stronger Chinese yuan also weighed on the dollar after it rose to a 4-year high Friday.

The dollar recovered from its worst level after US import prices ex-petroleum rose the most in 5 months last month, a hawkish factor for Fed policy, and after manufacturing production rose as expected last month.  Also, Friday’s +3% surge in WTI crude oil to a 1-monthhigh raises inflation expectations and could persuade the Fed to tighten monetary policy, a bullish factor for the dollar. 

The US Sep import price index ex-petroleum rose +0.8% m/m, stronger than expectations of +0.6% m/m and the largest increase in 5 months.

US Sep manufacturing production rose +0.3% m/m, right on expectations.

Markets are pricing in a 17% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) rose to a 1.5-week high on Friday and finished up by +0.15%.  Dollar weakness on Friday supported the euro.   Also, hawkish comments on Friday from ECB Governing Council member Nagel gave the euro a boost when he said the ECB may have to raise interest rates further to tame inflation. 

The euro fell from its best level Friday after crude oil prices jumped to a 1-month high and European nat-gas prices soared to a 3.75-year high, which are negative for the Eurozone economy and the euro, as Europe imports most of its energy.

ECB Governing Council member and Bundesbank President Joachim Nagel said. "The ECB has raised interest rates twice, and if the situation remains as it is, we don't rule out the possibility that we may have to take further action."

The markets are discounting a 10% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) gave up an early advance on Friday and finished unchanged.  The yen found early support Friday amid a weaker dollar.  Hawkish comments from BOJ Governor Ueda also boosted the yen when he said the BOJ will continue raising interest rates. 

However, the yen gave up its advance after crude oil prices surged more than +3% to a 1-month high, which is negative for the Japanese economy and the yen as Japan imports more than 90% of its energy. 

BOJ Governor Kazuo Ueda said, "Given that the underlying inflation rate is approaching 2% and that current financial conditions remain accommodative, I believe we will continue to raise the policy interest rate in response to developments in the economy, prices, and financial conditions."  He added that he "can't tolerate" underlying inflation rising further above 2%.

Markets are pricing in a 4% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up +11.00 (+0.26%) on Friday, and December COMEX silver (SIZ26) closed up +0.149 (+0.26%).

Precious metals prices settled higher on Friday after the dollar index tumbled to a 2-week low. Also, Fed Chair Powell's lack of guidance on the economy or monetary policy at the IMF’s annual meeting reduced the chance of a Fed rate hike at the October 27-28 FOMC meeting to 17% from 27%, supporting precious metals. 

However, precious metals fell from their best levels Friday after WTI crude oil surged more than +3% to a 1-month high, raising inflation expectations and potentially prompting the world’s central banks to tighten monetary policy, a bearish factor for precious metals.  Also, hawkish central bank comments on Friday weighed on precious metals after ECB Governing Council member Joachim Nagel said the ECB may have to raise rates further to contain inflation, and BOJ Governor Kazuo Ueda said the BOJ will continue to raise interest rates.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high last Thursday.  Long holdings in silver ETFs rose to a 6.5-month high on Friday.

Strong central bank demand for gold is supporting gold prices, after last Thursday’s 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.

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.