The dollar index (DXY00) on Tuesday rose by +0.83%. The dollar on Tuesday climbed to a 1-week high as higher T-note yields strengthened the dollar’s interest rate differentials. Also, a slump in stocks Tuesday boosted the liquidity demand for the dollar. In addition, an escalation of geopolitical risks in the Middle East has boosted safe-haven demand for the dollar after Iran dispatched a warship into the Red Sea after the U.S. Navy said it was fired upon when responding to a distress call from a vessel in the Red Sea.
U.S. economic news Tuesday was dovish for Fed policy and bearish for the dollar. The Dec S&P manufacturing PMI was unexpectedly revised lower to a 6-month low of 47.9 versus expectations of an upward revision to 48.4.
The markets are discounting the chances for a -25 bp rate cut at 11% for the next FOMC meeting on Jan 30-31 and at an 88% chance for that -25 bp rate cut for the following meeting on March 19-20.
EUR/USD (^EURUSD) on Tuesday fell by -0.86% and posted a 1-week low. Strength in the dollar Tuesday weighed on the euro. Also, economic concerns weigh on EUR/USD after Tuesday’s news showed that the Eurozone Dec S&P manufacturing PMI contracted for the eighteenth consecutive month.
The Eurozone Dec S&P manufacturing PMI was revised upward by +0.2 to 44.4 from the previously reported 44.2, but that was the eighteenth consecutive month that manufacturing activity contracted.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 7% for its next meeting on January 25 and at 61% for the following meeting on March 7.
USD/JPY (^USDJPY) on Tuesday rose by +0.69%. The yen on Tuesday was under pressure from higher T-note yields. Tuesday’s trading activity in the yen was dampened with markets closed in Japan through Wednesday for the New Year’s holiday.
February gold (GCG4) Tuesday closed +1.60 (+0.08%), and Mar silver (SIH24) closed -0.133 (-0.55%). Gold and silver on Tuesday settled mixed. Today’s rally in the dollar index was bearish for metals prices. Also, higher global bond yields were negative for precious metals. Silver was under pressure on industrial metals demand concerns after the U.S. Dec S&P manufacturing PMI was unexpectedly revised lower to a 6-month low, the China Dec manufacturing PMI unexpectedly contracted at the steepest pace in 6 months, and the Eurozone Dec S&P manufacturing PMI contracted for the eighteenth consecutive month.
Gold prices found support Tuesday on the escalation of geopolitical risks in the Middle East that sparked safe-haven demand for gold after Iran dispatched a warship to the Red Sea following the U.S. Navy’s sinking of three Houthi boats. Also, Tuesday’s stock weakness boosted some safe-haven demand for precious metals.
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