The dollar index (DXY00) on Tuesday fell by -0.24%. The dollar gave up its overnight advance and turned lower after ECB President Lagarde’s upbeat comments pushed the euro higher and weighed on the dollar. 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. Losses in the dollar accelerated after dovish comments from Fed Chair Powell reinforced expectations that the Fed will cut interest rates at the October 28-29 FOMC meeting.
The dollar initially moved higher on Tuesday on a flight to safety as stocks slumped due to the escalation of US-China trade tensions. Additionally, weakness in the British pound benefited the dollar on Tuesday after weak UK labor news pushed GBP/USD down to a two-month low.
The US Sep NFIB small business optimism index fell -2.0 to 98.8, weaker than expectations of 100.6.
Fed Chair Powell said labor market perceptions remain on a downward trajectory and that the Fed may stop shrinking its balance sheet and end quantitative tightening in the coming months.
The US-China trade conflict escalated further after China sanctioned five US units of South Korean shipbuilder Hanwha Ocean Co., the latest in a series of tit-for-tat moves as both countries have imposed special port fees on each other’s vessels. The moves have implications for the global economy, as vessels are responsible for moving more than 80% of international trade.
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 rose by +0.30%. The euro recovered from early losses on Tuesday and turned higher after ECB President Lagarde’s upbeat comments sparked short covering in the euro, when she stated that the Eurozone economy is “in a good place.” The euro also garnered support Tuesday after the German Oct ZEW expectations of economic growth survey rose more than expected.
The euro initially moved lower on Tuesday due to a slump in German bund yields after the 10-year German bund yield fell to a 3.25-month low at 2.583%, which weakened the euro’s interest rate differentials. The euro is also being undercut by political uncertainty in France, as French Prime Minister Lecornu may be forced out due to a no-confidence ballot on Thursday. The new government must now survive a no-confidence vote at the National Assembly on Thursday to avoid the need to call for a snap election.
The German Oct ZEW expectations of economic growth survey rose +2.0 to 39.3, weaker than expectations of 41.1.
ECB President Lagarde said the Eurozone economy is “in a good place” as risks to the economic outlook are more balanced and the Eurozone economy has been relatively resilient to tariffs.
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 fell by -0.34%. The yen rose against the dollar on Tuesday as the escalation of US-China trade tensions sparked safe-haven demand for the yen. The yen also rose on jawboning from Japanese Finance Minister Kato, who said the Japanese government “will closely examine” any excessive or disorderly moves in the foreign-exchange market, hinting the government could soon intervene in currency markets to support the yen.
The yen has been under pressure over the past week due to concerns that the election of Sanae Takaichi as the leader of Japan’s ruling Liberal Democratic Party, which makes her the likely new Prime Minister of Japan, will result in a slower timeline for the BOJ’s policy tightening. Takaichi’s surprise victory has tempered expectations that the BOJ may raise interest rates as soon as this month, while raising concerns about an increased debt supply due to her support for expanded financial stimulus. Additionally, Japan’s governing coalition collapsed following talks between LDP leader Takaichi and Komeito leader Saito, which ended without an agreement being reached. The move makes it harder for Takaichi to garner the support needed to pass budgets or any meaningful legislation, and could potentially lead to another election.
December COMEX gold (GCZ25) on Tuesday closed up +30.40 (+0.74%), and December COMEX silver (SIZ25) closed up +0.1934 (+0.38%). Gold and silver prices rallied on Tuesday, with Dec gold posting a new contract high and nearest-futures (V25) posting a new all-time high of $4,160.10 a troy ounce. Also, December silver posted a new contract high, and the nearest-futures (V25) silver price reached a record high of $51.985 per troy ounce.
The escalation of US-China trade tensions is supporting safe-haven demand for precious metals, following China’s sanction of five US units of South Korean shipbuilder Hanwha Ocean Co. This latest move is part of a series of tit-for-tat actions, as both countries have imposed special port fees on each other’s vessels. Also, the ongoing US government shutdown has fueled demand for the metals as a safe haven. Precious metal maintained their gains on Tuesday due to dovish comments from Fed Chair Powell that reinforced expectations of a Fed rate cut at the October 28-29 FOMC meeting.
Gains in gold were limited by hawkish comments from ECB President Lagarde, who stated that the Eurozone economy is “in a good place” and that risks to the economic outlook are more balanced, thereby dampening speculation of easier ECB policy. Also, gains in silver prices were contained due to concerns that the escalation of the US-China trade conflict will slow global economic growth and demand for industrial metals.
Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs, geopolitical risks, and political turmoil in France and Japan. 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-year high on October 1.
