Dollar Sees Support as T-note Yields Rise

The dollar posted a marginal gain, buoyed by higher 10-year T-note yields and carry-over support from Fed Chair Powell's recent hawkish stance, yet it was pressured by weaker-than-expected US manufacturing PMI and dovish remarks from Fed Governors Miran and Cook, who indicated current policy is overly restrictive and emphasized labor market risks. Markets are now pricing a 67% probability of a 25 bp Fed rate cut in December, a sentiment reinforced by the ongoing US government shutdown. This central bank divergence, with the ECB nearing the end of its easing cycle versus anticipated multiple Fed cuts, weighed on EUR/USD, while USD/JPY rose amid BOJ hike uncertainty. Gold, despite dollar strength, found support from safe-haven demand and robust central bank purchases.

Analysis

The dollar index (DXY00) saw a marginal +0.07% rise, primarily supported by a +2.7 bp increase in the 10-year T-note yield and carry-over from Fed Chair Powell's recent hawkish stance. However, this was counterbalanced by dovish remarks from Fed Governors Miran and Cook, who suggested current policy is overly restrictive and highlighted labor market weakness risks over inflation. Chicago Fed President Goolsbee expressed inflation concerns but remained undecided on December policy, indicating a nuanced internal Fed perspective.

US economic data presented a mixed picture, with the October ISM manufacturing index falling to 48.7, weaker than expected, and the ISM prices paid index also declining significantly to 58.0, reinforcing dovish Fed policy expectations. Despite this, the final-October S&P US manufacturing PMI was revised slightly higher to 52.5, exceeding forecasts. Markets are currently pricing a substantial 67% chance of a 25 basis point Fed rate cut in December, influenced by these data points and the ongoing US government shutdown.

The EUR/USD pair declined by -0.16%, reflecting mild dollar strength and significant central bank divergence, as the ECB is perceived to be concluding its rate-cut cycle while the Fed is anticipated to implement multiple cuts through 2026. Conversely, USD/JPY gained +0.12%, with the yen remaining weak due to Japanese political uncertainty and delayed Bank of Japan rate hike expectations, despite a 45% market probability of a BOJ hike in December.

December COMEX gold closed up +0.44%, benefiting from bargain hunting after a recent sell-off and robust safe-haven demand driven by the US government shutdown, geopolitical risks, and central bank purchases, which surged 28% in Q3. However, a stronger dollar and higher T-note yields presented headwinds, alongside ongoing long liquidation pressures and declining gold ETF holdings.

Key Decisions for Investors

• Investors should closely monitor upcoming Fed communications and key economic indicators, particularly inflation and labor market data, to refine expectations for the timing and magnitude of potential rate cuts given the mixed signals.
• Evaluate currency exposure, especially in EUR/USD and USD/JPY, considering the pronounced central bank divergence and differing rate outlooks between the Fed, ECB, and BOJ.
• Assess gold's role in portfolios, balancing its safe-haven appeal and central bank demand against potential headwinds from dollar strength and yield movements.
• Factor the ongoing US government shutdown and its potential economic implications, including increased pressure for Fed rate cuts, into broader market risk assessments.