Dollar Sees Support from Yuan and Yen Weakness

The dollar index (DXY00) Wednesday finished up by +0.27% and posted a 2-week high.  The dollar found support Wednesday on weakness in the Chinese yuan after Reuters reported that Chinese policymakers are considering allowing the yuan to depreciate, abandoning its stable-currency policy to compensate for any impact from US tariffs.  Also, weakness in the yen boosted the dollar as the yen fell to a 2-week low Wednesday on a Bloomberg report that said the BOJ is in no hurry to raise interest rates.

The dollar fell back from its best levels Wednesday after the US Nov CPI report came in right on expectations, bolstering the outlook for the FOMC to cut interest rates by 25 bp at next week’s meeting.  The chances for a 25 bp Fed rate cut rose to 95% from 86% after the release of the Nov CPI report.  Also, strength in stocks Wednesday curbed liquidity demand for the dollar.

US Nov CPI rose +0.3% m/m and +2.7% y/y, right on expectations.  Also, Nov CPI ex-food and energy rose +0.3% m/m and +3.3% y/y, right on expectations.

The markets are discounting the chances at 95% for a -25 bp rate cut at the December 17-18 FOMC meeting.

EUR/USD (^EURUSD) Wednesday fell by -0.31%.  The euro on Wednesday extended this week’s losses on expectations that the ECB would cut interest rates by 25 bp at Thursday’s policy meeting.  Losses in the euro were contained Wednesday after the dollar fell back from its best levels on the Fed-friendly US Nov CPI report, which boosted the chances of a Fed rate cut next week.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for Thursday’s meeting and at 5% for a -50 bp rate cut at the same meeting.

USD/JPY (^USDJPY) Wednesday rose by +0.39%.  The yen on Wednesday extended this week’s slide to a 2-week low against the dollar after Bloomberg reported the BOJ is in no hurry to raise interest rates.  Losses in the yen were limited after Wednesday’s news showed Japan’s Nov PPI rose more than expected, and the Q4 BSI large manufacturing business conditions index rose to a 3-year high, hawkish factors for BOJ policy. 

Japan Nov PPI rose +0.3% m/m and +3.7% y/y, stronger than expectations of +0.2% m/m and +3.4% y/y, with the +3.7% y/y gain the largest year-on-year increase in 16 months. 

The Japan Q4 BSI large manufacturing business conditions index rose to 6.3 from 4.5 in Q3, the strongest in 3 years.

Bloomberg reported that BOJ officials see little cost to waiting before raising interest rates, dampening chances that the BOJ will raise interest rates at its December 19 meeting.

February gold (GCG25) Wednesday closed up +38.30 (+1.41%), and March silver (SIH25) closed up +0.220 (+0.67%).  Precious metals settled moderately higher on Wednesday, with gold and silver posting 5-week highs.  Wednesday’s US Nov CPI report came on right on expectations, which boosted the chances for a 25 bp Fed rate cut at next week’s FOMC meeting to 96% from 86% before the report, a bullish factor for precious metals.  Precious metals prices also have safe-haven support with the collapse of the Syrian government and the escalation of hostilities in the Ukraine-Russia conflict.  In addition, gold found support as a store of value from today’s Bloomberg report that said the BOJ is in no hurry to raise interest rates. 

Wednesday’s strength in stocks has curbed some safe-haven demand for precious metals.   Also, Wednesday’s rally in the dollar index to a 2-week high was negative for precious metals.  Silver prices were undercut Wednesday by a Reuters report that said Chinese policymakers are considering allowing the yuan to depreciate, abandoning the current stable-currency policy to compensate for any impact from US tariffs.  A softer yuan will make commodities, including silver, more expensive for importers. 

On the date of publication,

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