The dollar index (DXY00) today fell from a 1-week high on Monday and finished down by -0.31%. The dollar is under pressure on the outlook for easier Fed policy, with the FOMC expected to cut interest rates by another 50 bp this year. The dollar found support Monday on hawkish comments from St. Louis Fed President Alberto Musalem, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Beth Hammack, who said they see limited room for additional Fed interest rate cuts.
The dollar is also being undercut by concerns over Fed independence, which could prompt foreign investors to dump dollar assets as President Trump attempts to fire Fed Governor Cook, and by Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors.
The US Aug Chicago Fed national activity index rose +0.16 to a 5-month high of -0.12, stronger than expectations of -0.15.
St. Louis Fed President Alberto Musalem said he sees limited room for additional Fed interest rate cuts amid elevated inflation and believes rates are now "between modestly restrictive and neutral."
Atlanta Fed President Raphael Bostic said he sees "little reason" for the Fed to cut interest rates further, as he is concerned about elevated inflation and does not see inflation returning to 2% until 2028.
Cleveland Fed President Beth Hammack said, "I think that we should be very cautious in removing monetary policy restrictions" to avoid overheating the economy.
The markets are now pricing in a 90% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.
EUR/USD (^EURUSD) on Monday rose by +0.43%. Dollar weakness on Monday was a supportive factor for the euro. Also, last Friday's action by Fitch Ratings to upgrade Italy's sovereign credit rating by one notch was positive for the euro. In addition, Monday's stronger-than-expected report on Eurozone Sep consumer confidence was bullish for the euro. The euro rose to its high on Monday afternoon when ECB Governing Council member and Bundesbank President Nagel said he's "not concerned" about the valuation of the euro.
The euro also has support from central bank divergence, as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates by roughly two more times by the end of this year.
The Eurozone Sep consumer confidence index rose +0.6 to -14.9, stronger than expectations of -15.0.
Fitch Ratings last Friday upgraded Italy's sovereign debt to BBB+ from BBB with a stable outlook, citing "increased confidence in Italy's fiscal trajectory."
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 Monday fell by -0.16%. The yen recovered from a 2-week low on Monday and turned higher due to a weaker dollar. Also, higher Japanese government bond yields have strengthened the yen's interest rate differentials after the 10-year JGB bond yield climbed to a 17-year high on Monday at 1.670%. Higher T-note yields on Monday limited gains in the yen.
December gold (GCZ25) on Monday closed up +69.30 (+1.87%), and December silver (SIZ25) closed up +1.262 (+2.94%). Precious metal prices rallied sharply on Monday, with Dec gold posting a contract high and nearest-futures (U25) gold posting a new record high of $3,746.20 a troy ounce. Also, Dec silver climbed to a contract high, and nearest-futures (U25) posted a 14-year high.
Monday's weaker dollar was supportive for precious metals. Also, the outlook for the Fed to keep cutting interest rates has boosted demand for precious metals as a store of value. Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs and President Trump's attacks on Fed independence, as he attempts to fire Fed Governor Cook. Additionally, Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors contributes to this uncertainty. Finally, geopolitical risks and global trade tensions have boosted safe-haven demand for precious metals.
Precious metals prices continue to receive support from fund buying of precious metal ETFs. Gold holdings in ETFs rose to a nearly 3-year high last Friday, and silver holdings in ETFs rose to a 3-year high the same day.
Hawkish comments from St. Louis Fed President Alberto Musalem, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Beth Hammack on Monday were bearish for precious metals after T-note yields rose when they said they see limited room for additional Fed interest rate cuts.
