Dollar Slightly Higher on Signs of U.S. Economic Strength

The dollar index (DXY00) on Thursday rose by +0.08% but remained below Wednesday’s 1-month high.  The dollar recovered from overnight losses and rose slightly as better-than-expected U.S. economic reports on weekly jobless claims and Dec housing starts pushed T-note yields higher.  The upside in the dollar was limited as Thursday’s stock rally curbed liquidity demand for the dollar.

Thursday’s U.S. economic news was primarily hawkish for Fed policy and bullish for the dollar.  Weekly initial unemployment claims unexpectedly fell -16,000 to a 16-month low of 187,000, showing a stronger labor market than expectations of 205,000.  Also, Dec housing starts fell -4.3% m/m to 1.460 million, stronger than expectations of 1.425 million.  In addition, Dec building permits, a proxy for future construction, rose +1.9% m/m to 1.495 million, stronger than expectations of 1.477 million.  On the negative side, the Jan Philadelphia Fed business outlook survey rose +2.2 to -10.6, weaker than expectations of -6.5.

Atlanta Fed President Bostic said he wants to see more evidence inflation is on track toward the Fed's 2% target, and his outlook "is for our first cut in rates sometime in the third quarter this year."

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 55% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Thursday fell by -0.16% but remained above Tuesday’s 1-month low.  The stronger dollar on Thursday pressured the euro.  Also, signs of economic weakness in the Eurozone weighed on the euro after Thursday’s news that Eurozone Dec new car registrations fell by the most in 17 months.  Losses in EUR/USD were limited by Thursday’s hawkish account of the ECB’s Dec 13-14 meeting that showed ECB officials pushed back on market expectations for ECB interest rate cuts. 

Eurozone Dec new car registrations fell -3.3% y/y to 867,000, the biggest decline in 17 months.

The account of the Dec 13-14 ECB meeting was a bit hawkish as policymakers pushed back on rate cut expectations and said they were concerned that speculation in the market for monetary easing "could derail the disinflationary process."  The ECB said, "It was widely felt that market expectations reflected significant optimism and were inconsistent with the outlook in the staff projections, with respect to both the inflation outlook and the rate path embodied in the technical assumptions."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 3% for its next meeting on January 25 and 23% for the following meeting on March 7.

USD/JPY (^USDJPY) on Thursday rose by +0.05%.  The yen on Thursday gave up an early advance and posted modest losses but remained above Wednesday’s 1-1/2 month low against the dollar. Higher T-note yields Thursday weighed on the yen as well as weak Japanese economic news after Japan Nov core machine orders posted their biggest decline in 6 months.  On Thursday, the yen initially moved higher on strength in Japanese government bond yields after the 10-year JGB bond yield climbed to a 4-week high of 0.654%.

Japan Nov core machine orders fell -4.9% m/m, weaker than expectations of -0.8% m/m and the biggest decline in 6 months.

February gold (GCG4) Thursday closed +15.10 (+0.75%), and Mar silver (SIH24) closed +0.138 (+0.61%).  Precious metals on Thursday closed moderately higher.  Gold has safe-haven support from geopolitical risks in the Middle East as Houthi rebels continue to attack ships in the Red Sea off the Yemen coast.  Also, an increase in inflation expectations boosted demand for gold as an inflation hedge after the 10-year breakeven inflation rate rose to a 2-month high of 2.348% Thursday.  Silver found support on signs of U.S. economic strength that are positive for industrial metals demand after weekly jobless claims fell to a 16-month low and Dec building permits, a proxy for future construction, rose more than expected.

Gains in gold were limited by a stronger dollar and higher global bond yields.  Also, the account of the Dec 13-14 ECB meeting released Thursday was bearish for gold as it showed ECB officials pushed back on market expectations of ECB rate cuts.   

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