Dollar Jumps on Higher T-note Yields and Hawkish Waller Comments

The dollar index (DXY00) on Tuesday rose by +0.93% and posted a 1-month high.  On Monday, the dollar rallied on higher T-note yields and hawkish comments from Fed Governor Waller, who said there’s “no reason” for the Fed to move and cut rates as rapidly as in the past.  Also, the weakness in stocks on Tuesday boosted liquidity demand for the dollar. 

Tuesday’s U.S. economic news was bearish for the dollar after the Jan Empire manufacturing survey general business conditions index unexpectedly plunged -29.2 to a 3-1/2 year low of -43.7, weaker than expectations of an increase to -5.0.

Hawkish comments Tuesday from Fed Governor Waller were supportive of the dollar after he said when the Fed begins cutting interest rates, it should be methodical and careful, and there’s “no reason” to move as quickly and cut as rapidly as in the past. 

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on Jan 30-31 and a 69% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Tuesday fell by -0.69% and posted a 1-month low.  A fall in Eurozone inflation expectations was dovish for ECB policy and bearish for the euro as the ECB's Eurozone Nov inflation expectations declined.  Also, Tuesday’s comments from ECB Governing Council members Centeno and Simkus weighed on the euro when Centeno said Q1 Eurozone GDP is still looking pretty stagnant, and Simkus said he’s “far less optimistic” than markets on ECB rate cuts.   

The ECB's Eurozone Nov 1-year inflation expectations eased to +3.2% from +4.0% in Oct, the lowest in 21 months.  The Nov 3-year inflation expectations eased to a 22-month low +2.2% from +2.5% in Oct, better than expectations of +2.4%.

The German Jan ZEW survey expectations of economic growth index unexpectedly rose +2.4 to an 11-month high of 15.2, stronger than expectations of a decline to 11.7.

ECB Governing Council member Simkus said he's "optimistic about ECB rate cuts this year, but far less optimistic than markets about rate cuts in March or April."

ECB Governing Council member Centeno said the Eurozone inflation trajectory is good, and Q1 Eurozone GDP is still looking pretty stagnant. 

ECB Governing Council member Villeroy de Galhau said, "The question of an ECB interest rate cut this year is a premature one" as the ECB will "probably be a bit more patient."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 2% for its next meeting on January 25 and 25% for the following meeting on March 7.

USD/JPY (^USDJPY) on Tuesday rose by +1.05%.  The yen on Tuesday tumbled to a 5-week low against the dollar. A jump in T-note yields on Tuesday undercut the yen.  Also, comments Tuesday from Fed Governor Waller dampened Fed rate cut expectations and boosted the dollar.  In addition, expectations that the BOJ will maintain its negative interest rate policy at next week’s meeting are bearish for the yen.  On the positive side for the yen, Japan’s December producer prices rose more than expected, a hawkish factor for BOJ policy.

Japan's Dec PPI report of +0.3% m/m and unchanged y/y was stronger than expectations of unchanged m/m and -0.3% y/y.

February gold (GCG4) Tuesday closed -21.40 (-1.04%), and Mar silver (SIH24) closed -0.236 (-1.01%).  Precious metals on Tuesday closed moderately lower.  Tuesday’s rally in the dollar index was bearish for metals. Also, higher global bond yields on Tuesday undercut precious metals prices.  In addition, hawkish global central bank comments dampened speculation of imminent interest rate cuts and weighed on precious metals when Fed Governor Waller said there’s “no reason” to move as quickly and cut rates as rapidly as in the past, and ECB Governing Council member Simkus said he’s “far less optimistic than markets about rate cuts in March or April."  Finally, the ongoing long liquidation of gold by funds is bearish for gold after long gold holdings in ETFs fell to a 4-year low last Friday. 

• Stocks Pressured by Higher Bond Yields and Mixed Earnings Results
• Dollar Recovers on Safe Haven Demand from Geopolitical Risks in the Middle East
• Stocks Weighed Down by Losses in Airlines and Health Insurers
• Dollar Gives Up Early Gains as T-Note Yields Decline

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