The dollar index (DXY00) rallied to a 2-week high on Wednesday and finished up by +0.62%. The dollar found support on Wednesday amid easing global trade tensions, which are supportive of economic growth prospects. The US and South Korea finalized a trade deal on Wednesday that will see South Korea make $150 billion in shipbuilding investments and cap US tariffs on South Korean goods at 15%. Also, President Trump said he expects to lower tariffs on Chinese goods over the fentanyl crisis.
Gains in the dollar accelerated on Wednesday despite the FOMC cutting interest rates by 25 bp later today and ending quantitative tightening. The dollar jumped on hawkish comments from Fed Chair Powell, who said a rate cut at the December FOMC meeting "is not a foregone conclusion."
The dollar is still under pressure from the ongoing US government shutdown. The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.
US Sep pending home sales were unchanged m/m, weaker than expectations of a +1.2% m/m increase.
As expected, the FOMC on Wednesday cut the federal funds target range by -25 bp to 3.75%-4.00% from 4.00%-4.25%. The Fed also said it will end quantitative tightening and stop shrinking its balance sheet on December 1.
The FOMC post-meeting statement said that "downside risks to employment rose in recent months," and that "inflation has moved up since earlier in the year and remains somewhat elevated."
Fed Chair Powell cautioned against the assumption that the Fed will cut interest rates again in December, saying, "A further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion, far from it."
The markets are discounting a 69% chance that the FOMC will cut the fed funds target range by 25 bp at the next FOMC meeting on December 9-10. The markets are discounting an overall 72 bp rate cut by the end of 2026 to 3.40% from the current effective federal funds rate of 4.12%.
The dollar still has some negative carryover from Monday on reduced safe-haven demand after US and Chinese negotiators, who met over the weekend in Malaysia, said they reached a tentative trade agreement. The agreement is expected to be finalized at Thursday's summit between Presidents Trump and Xi on the sidelines of the APAC conference in South Korea. Treasury Secretary Bessent said the agreement means the US threat of a 100% tariff on US imports from China, set to start November 1, is "effectively off the table." Meanwhile, China agreed not to restrict the export of rare earth metals for at least one year and to buy a "substantial" amount of US soybeans. The two sides also made progress on shipping fees and US demands that China crack down on the export to the US of fentanyl and precursors. The two sides may also reach an agreement that would allow US consumers to continue to access TikTok.
EUR/USD (^EURUSD) on Wednesday fell by -0.60% today due to strength in the dollar. Losses in the euro are limited by central bank divergence, with the ECB seen as finished with its rate-cut cycle while the Fed is expected to cut rates by at least another percentage point by the end of 2026.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) on Wednesday rose by +0.56%. The yen fell from a 1-week high against the dollar on Wednesday after T-note yields jumped when Fed Chair Powell cautioned against the assumption that the Fed will cut interest rates again this year.
The yen initially moved higher on Wednesday after Treasury Secretary Bessent said the Japanese government's "willingness to allow the BOJ policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility." Also, Wednesday's jump in Japan's Oct consumer confidence index to a 10-month high was supportive of the yen.
The Japan Oct consumer confidence index rose +0.5 to a 10-month high of 35.8, stronger than expectations of 35.5.
The market consensus is that the Bank of Japan, at its policy meeting this week on Wednesday/Thursday, will keep its policy rate unchanged at 0.50%. The odds of a rate hike are only at 14%, according to Japanese swap rates.
December COMEX gold (GCZ25) on Wednesday closed up +17.60 (+0.44%), and December COMEX silver (SIZ25) closed up +0.589 (+1.24%).
Precious metals prices settled higher on Wednesday, recovering some of this week's losses that knocked gold to a 3-week low on Tuesday and silver to a 1-month low. Short covering emerged in precious metals on Wednesday ahead of the conclusion of the FOMC meeting.
Gold prices fell more than -$40.00 an ounce in after-hours trading on Wednesday afternoon, even after the FOMC, as expected, cut the fed funds target range by -25 bp and said it would end quantitative tightening on December 1. Hawkish comments on Wednesday afternoon from Fed Chair Powell pushed the dollar index to a 2-week high and weighed on precious metals when he said, "A further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion."
Precious metals have underlying safe-haven support due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed's independence. In addition, recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals.
Since posting record highs earlier this month, long liquidation pressures have weighed on precious metals prices. Precious metals prices this week have also been weighed down by reduced safe-haven demand following the US-China preliminary trade agreement announced over the weekend. In addition, this week's rally in the S&P 500 to a new record high has curbed safe-haven demand for precious metals.
Precious metals prices have been under pressure this week amid heavy long liquidation and ETF outflows. Holdings in gold ETFs have fallen from last Tuesday's 3-year high, and silver ETF holdings have dropped from last Tuesday's 3.25-year high.
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.
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