Dollar Ends Slightly Lower as Stocks Rally on Government Reopening Plans

The dollar index (DXY00) on Monday fell by -0.03%.  The dollar was under pressure Monday on optimism that the US government shutdown is nearing an end after a group of Senate Democrats broke with the rest of their party to vote with Republicans to advance a bill to reopen the government.  The reopening of the government would allow the release of economic reports, which may show a weakening US economy, prompting the Fed to keep cutting interest rates.  Also, the strength in stocks on Monday reduced liquidity demand for the dollar.

Losses in the dollar were limited on Monday after St. Louis Fed President Alberto Musalem said he expects the US economy to bounce back next quarter and there’s limited room for additional Fed rate cuts.  Also, higher T-note yields on Monday strengthened the dollar’s interest rate differentials and are supportive of the dollar.

San Francisco Fed President Mary Daly said, “So far, the effects of the tariffs have largely been confined to goods, with little spillover into services inflation or inflation expectations, which remain relatively well-anchored around our 2% target.”

St. Louis Fed President Alberto Musalem said he expects “a substantial rebound in the US economy in the first quarter, and there’s limited room for further interest rate reductions without monetary policy becoming overly accommodative.”

The markets are discounting a 62% chance that the FOMC will cut the fed funds target range by 25 bp at the next FOMC meeting on December 9-10.

EUR/USD (^EURUSD) on Monday fell by -0.03%.  The euro posted modest losses on Monday after the Eurozone Nov Sentix investor confidence index unexpectedly declined.  However, central bank divergence is supportive of the euro, with the ECB seen as largely finished with its rate-cut cycle, while the Fed is expected to cut rates several more times by the end of 2026.

The Eurozone Nov Sentix investor confidence index unexpectedly fell -2.0 to -7.4, weaker than expectations of an increase to -4.0.

Swaps are pricing in a 4% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.

USD/JPY (^USDJPY) on Monday rose by +0.39%.  The yen was under pressure Monday amid signs that Japanese Prime Minister Takaichi will pursue a more expansionary fiscal policy, after she said she would drop an annual budget-balancing goal.  Also, higher T-note yields on Monday weighed on the yen.  On the positive side for the yen, the Japan Sep leading index CI rose more than expected to an 8-month high.

The yen has recently been weak due to Japanese political uncertainty and a delayed BOJ rate hike.  The markets are discounting a 49% chance of a BOJ rate hike at the next policy meeting on December 19.

The Japan Sep leading index CI rose +1.0 to an 8-month high of 108.0, stronger than expectations of 107.9.

December COMEX gold (GCZ25) on Monday closed up +112.20 (+2.80%), and December COMEX silver (SIZ25) closed up +2.168 (+4.50%).

Precious metals rallied sharply higher on Monday, with gold posting a 2-week high and silver climbing to a 2.5-week high.   Gold and silver prices soared on Monday on speculation that the end of the US government shutdown will allow the release of economic reports showing the economy is weakening, which could prompt the Fed to keep cutting interest rates.  Dollar weakness on Monday was also bullish for metals.  Precious metals also rose after Japanese Prime Minister Takaichi signaled a shift toward more expansionary fiscal policy by saying she would drop an annual budget-balancing goal, which boosted demand for precious metals as a store of value.  In addition, strong central bank demand for gold is supportive of prices, following last week’s report from China’s PBOC that bullion held in its reserves rose to 74.09 million troy ounces in October, the twelfth consecutive month the PBOC has boosted its gold reserves.  Last Thursday, the World Gold Council reported that global central banks purchased 220 MT of gold in Q3, up 28% from Q2.

Precious metals continue to have some underlying safe-haven demand amid the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed’s independence.

Since posting record highs in mid-October, long liquidation pressures have weighed on precious metals prices.  Holdings in gold and silver ETFs have recently fallen after posting 3-year highs on October 21.

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. This article was originally published on Barchart.com