The dollar index (DXY00) tumbled to a 1-month low today and is down by -0.22%. Today’s -6% plunge in crude oil prices has eased inflation expectations, which could persuade the Fed to ease monetary policy, a bearish factor for the dollar. Also, today’s stock recovery has reduced demand for dollar liquidity. In addition, the dollar is weighed down by the -3.1 bp decline in the 10-year T-note yield that undercut the dollar’s interest rate differentials. The dollar recovered from its worst level after the Oct ISM manufacturing index unexpectedly increased.
The US Oct ISM manufacturing index unexpectedly rose by +1.0 to 55.5, stronger than expectations of no change at 54.5. The Oct ISM prices paid sub-index fell -2.7 to 75.2, weaker than expectations of 77.2.
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US Sep construction spending unexpectedly fell -1.9% m/m, weaker than expectations of a +0.3% m/m increase and the biggest decline in nearly 6.5 years.
The markets are now pricing in a 77% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9.
EUR/USD (^EURUSD) climbed to a 1-week high today and is up by +0.44%. Dollar weakness today is supporting euro gains. Also, the upward revision to the Eurozone Oct S&P manufacturing PMI was positive for the euro. In addition, hawkish comments today from ECB Governing Council member Peter Kazimir boosted the euro when he said investors may not be pricing in enough ECB tightening to contain inflation.
The Eurozone Oct S&P manufacturing PMI was revised upward by +0.3 to 52.7 from the previously reported 52.4.
German Sep retail sales unexpectedly fell -2.0% m/m versus expectations of a +0.4% m/m increase.
ECB Governing Council member Peter Kazimir said, “Markets may still underestimate what is required” and may not be pricing in enough ECB tightening, with the energy shock showing no sign of fading and inflation picking up again.
The markets are now pricing in an 87% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17.
USD/JPY (^USDJPY) is up by +0.11% today. The yen is under pressure today on signs of reduced safe-haven demand after equity markets rebounded from last Friday’s sharp losses. Losses in the yen are limited after crude oil prices tumbled more than -6% to a 1.5-week low, which is positive for Japan’s economy, as Japan imports more than 90% of its energy. Also, comments today from Japanese Finance Minister Satsuki Katayama fueled speculation that Japanese authorities could intervene in the forex market to support the yen when she said that Japanese authorities are prepared to respond if currency market movements become disorderly.
