Dollar Climbs and Gold Plunges

The dollar index (DXY00) on Tuesday rose by +0.34% to a four-session high.  The dollar moved higher on Tuesday due to weakness in the yen, which slid to a one-week low against the dollar on expectations that new Japanese Prime Minister Takaichi will maintain an expansionary fiscal policy.  The dollar also has carryover support from Monday, when US-China trade tensions eased after President Trump said, “I think we’re going to be fine with China.” 

Gains in the dollar were limited after the Oct Philadelphia Fed non-manufacturing business activity survey fell to a 4-month low.  Also, the ongoing shutdown of the US government is bearish for the dollar. The longer the shutdown is maintained, the more likely the US economy will suffer, a negative factor for the dollar.

The Oct Philadelphia Fed non-manufacturing business activity survey fell -9.9 to a 4-month low of -22.2.

The markets are pricing in a 97% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.

EUR/USD (^EURUSD) on Tuesday fell by -0.31%.  The euro moved lower on Tuesday due to the strength of the dollar.  The euro is also weighed down by negative carryover from last Friday, when S&P Global Ratings cut France’s sovereign debt credit rating.  Further downside in the euro may be limited due to central bank divergence, with the Fed expected to keep cutting interest rates while the ECB is at the end of its rate-cutting cycle.

Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.

USD/JPY (^USDJPY) on Tuesday rose by +0.79%.  The yen tumbled to a one-week low against the dollar on Tuesday after Sanae Takaichi won the parliamentary vote to become Japan’s Prime Minister. Takaichi’s policies are unfavorable for the yen, as she advocates for increased deficit spending and expanded financial stimulus.  The yen was also under pressure after the Nikkei Stock Index rose to a new record high on Tuesday, which curbed safe-haven demand for the yen.

Japan’s Sep machine tool orders were revised upward to +11.0% y/y from the previously reported +9.9% y/y, the largest increase in 6 months.

December COMEX gold (GCZ25) on Tuesday closed down -250.30 (-5.74%), and December COMEX silver (SIZ25) closed down -3.680 (-7.16%).  Gold and silver prices plummeted on Tuesday to 1-week lows.  Tuesday’s stronger dollar weighed on metals prices.  Also, the easing of US-China trade tensions has sparked massive, long liquidation in precious metals after President Trump said relations with China “will be fine.”

Gold and silver prices rallied to record highs last week as they extended their two-month-long parabolic rally.  Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs, geopolitical risks, central bank buying, and US-China trade tensions. Also, President Trump’s attacks on Fed independence are boosting demand for gold.  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.

Precious metals prices continue to receive support from fund buying of precious metal ETFs.  Gold holdings in ETFs rose to a 3-year high on Monday, and silver holdings in ETFs rose to a 3.25-year high last Tuesday.

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