The dollar index dropped to a one-week low on Friday, concluding the day down by 0.15%. This decline was driven by several economic reports, including a significant rise in US job cuts and a notable decrease in consumer sentiment, which have led to heightened expectations for interest rate cuts by the Federal Reserve.
Job cut figures released by Challenger indicated that October saw a staggering 175% year-on-year increase in layoffs, marking the highest level of job cuts in 22 years. This alarming statistic has reinforced views that the Fed may continue to lower interest rates to stimulate economic growth. Adding to the downward pressure on the dollar was the University of Michigan‘s consumer sentiment index, which fell to 50.3, its lowest level in nearly 3.5 years, and below consensus expectations of 53.0.
The ongoing US government shutdown continues to weigh on the dollar’s strength. Analysts suggest that an extended shutdown could exacerbate economic challenges, prompting the Fed to consider further rate cuts. Despite these pressures, the dollar found some support due to a weakening stock market, which increased demand for the currency as a safe haven.
On the same day, Philip Jefferson, Vice Chair of the Federal Reserve, provided some reassurance for dollar bulls with comments suggesting a cautious approach to future rate cuts. Jefferson emphasized that interest rates currently exert a “somewhat restrictive” influence on the economy, advocating for a gradual approach as the Fed nears a neutral rate.
Economic indicators regarding inflation expectations presented a mixed picture. The University of Michigan reported an unexpected rise in one-year inflation expectations to 4.7%, surpassing the previous 4.6%. In contrast, the five-to-ten-year inflation expectations decreased to 3.6%, below the anticipated 3.8%.
Consumer credit data for September also revealed positive news, showing an increase of $13.093 billion, exceeding projections of $10.230 billion. Market forecasts suggest a 67% chance that the Federal Open Market Committee will implement a 25 basis point cut at its next meeting scheduled for December 9-10.
Euro Gains Ground Amid Weak Dollar
The euro appreciated against the dollar, finishing up by 0.15% and reaching a one-week high. This rise was attributed to the dollar’s decline and positive trade data from Germany, where exports and imports in September both exceeded expectations. Specifically, German exports rose by 1.4% month-on-month, the largest increase in 10 months, while imports surged by 3.1%, marking the biggest rise in 8 months.
The divergence in monetary policies between the European Central Bank (ECB) and the Federal Reserve is also contributing to the euro’s strength. The ECB is perceived as nearing the end of its rate-cutting cycle, while the Fed is expected to make additional cuts through the end of 2026. Current market swaps indicate only a 4% probability of a 25 basis point rate cut by the ECB at its upcoming policy meeting on December 18.
Japanese Yen and Precious Metals React to Economic Data
The yen saw a modest increase of 0.25% against the dollar, despite recent weakness attributed to political uncertainty in Japan and delayed monetary policy adjustments by the Bank of Japan. Household spending figures for September rose by 1.8% year-on-year, falling short of the 2.5% expected increase. The markets currently estimate a 49% likelihood of a rate hike at the Bank of Japan’s next meeting on December 19.
In the precious metals sector, COMEX gold closed up by $18.80 (+0.47%), while COMEX silver rose by $0.193 (+0.40%). The gains in these commodities were driven by the weaker dollar and increased demand for safe-haven assets amid the ongoing US government shutdown and geopolitical uncertainties. Additionally, strong central bank purchases, particularly from China, support higher gold prices, as the People’s Bank of China reported an increase in its gold reserves to 74.09 million troy ounces in October.
Despite the upward trend in precious metals, market analysts noted that demand concerns for industrial metals, particularly silver, are a growing worry. Recent data from China revealed unexpected declines in exports, which fell by 1.1% year-on-year, the largest drop in 8 months. These factors are likely to continue influencing market dynamics in the coming weeks.
