The dollar index (DXY00) on Friday rose by +0.27% and posted a fresh 2.75-month high.  Hawkish comments on Friday from Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack were supportive of the dollar when they cited reasons for opposing Fed rate cuts.  The dollar also rose after the Oct MNI Chicago PMI rose more than expected.  The dollar has carryover support from Wednesday on hawkish comments from Fed Chair Powell, who said a rate cut at the December FOMC meeting “is not a foregone conclusion.” Gains in the dollar were limited as Friday’s stock market rally curbed liquidity demand for the dollar.

The dollar is still under pressure from the ongoing US government shutdown.  The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.

The US Oct MNI Chicago PMI rose +3.2 to 43.8, stronger than expectations of 42.3.

Kansas City Fed President Jeff Schmid said he voted against the Fed’s 25 bp interest rate cut on Wednesday because “the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high.”

Dallas Fed President Lorie Logan said, “I did not see a need to cut rates this week, and I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly.”

Cleveland Fed President Beth Hammack said she “would have preferred to have held interest rate steady at Wednesday’s FOMC meeting as we need to maintain some amount of restriction to help get inflation back down to target.”

The markets are discounting a 63% chance that the FOMC will cut the fed funds target range by 25 bp at the next FOMC meeting on December 9-10.  The markets are discounting an overall 82 bp rate cut by the end of 2026 to 3.06% from the current effective federal funds rate of 3.88%.

EUR/USD (^EURUSD) on Friday tumbled to a 2.75-month low and finished down by -0.33%.  The dollar’s strength on Friday weighed on the euro.  Friday’s Eurozone economic news was supportive for the euro after the Eurozone Oct core CPI and German Sep retail sales rose more than expected. 

Central bank divergence is also supportive of the euro, with the ECB seen as finished with its rate-cut cycle while the Fed is expected to cut rates by at least another percentage point by the end of 2026.

The Eurozone Oct CPI eased to +2.1% y/y from +2.2% y/y in Sep, right on expectations.  Oct core CPI remained unchanged from Sep at +2.4% y/y, stronger than expectations of +2.3% y/y.

German Sep retail sales rose +0.2% m/m and +2.8% y/y, slightly stronger than expectations of +0.2% m/m and +2.7% y/y.

Swaps are pricing in a 4% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.

USD/JPY (^USDJPY) on Friday fell by -0.03%.  The yen posted modest gains on Friday as it consolidated just above Thursday’s 8.5-month low against the dollar.  Friday’s stronger-than-expected Japanese economic news on Sep industrial production and Oct Tokyo CPI are hawkish for BOJ policy and supportive for the yen.  The weaker-than-expected Japan Sep retail sales report limited gains in the yen.

Japan Sep industrial production rose +2.2% m/m, stronger than expectations of +1.5% m/m and the largest increase in seven months.

Japan Sep retail sales rose +0.3% m/m, weaker than expectations of +0.8% m/m.

Japan Oct Tokyo CPI rose +2.8% y/y, stronger than expectations of +2.4% y/y.  The Oct Tokyo CPI ex-fresh food and energy rose +2.8% y/y, stronger than expectations of +2.6% y/y.

December COMEX gold (GCZ25) on Friday closed down -19.40 (-0.48%), and December COMEX silver (SIZ25) closed down -0.456 (-0.94%).

Precious metals prices gave up an early advance on Friday and settled lower, with silver falling from a 1-week high.  Friday’s rally in the dollar index to a 2.75-month high sparked long liquidation in precious metals.  Also, hawkish Fed comments on Friday weighed on precious metals prices after Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan, and  Cleveland Fed President Beth Hammack cited reasons for opposing Fed rate cuts.  In addition, easing of US-China trade tensions has reduced safe-haven demand for precious metals.  Silver prices also came under pressure today on signs of weakness in Chinese industrial metals demand after the China Oct manufacturing PMI fell more than expected and contracted by the most in 6 months.   

Gold prices initially moved higher on Friday due to carryover support from Thursday on signs of stronger central bank gold buying, following the World Gold Council’s report that global central banks purchased 220 MT of gold in Q3, up 28% from Q2. 

Precious metals have underlying safe-haven support due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed’s independence.  In addition, recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals. 

Since posting record highs earlier this month, long liquidation pressures have weighed on precious metals prices.  Also, this week’s rally in the S&P 500 to a new record high has curbed safe-haven demand for precious metals and sparked heavy long liquidation and ETF outflows.  Holdings in gold ETFs have fallen from last Tuesday’s 3-year high, and silver ETF holdings have dropped from last Tuesday’s 3.25-year high.

The China Oct manufacturing PMI fell -0.8 to 49.0, weaker than expectations of 49.6 and the steepest pace of contraction in 6 months.

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