The Dollar took another step up earlier in the week, pushing the DXY back over 106. Once again the Euro was among the worst hit, closing Monday just under $1.05. The common currency is contending with the double threat of political instability within its borders as well as potential tariff hikes imposed by the incoming Trump presidency. The Japanese Yen continued to prove itself immune to such pressures, USDJPY refusing to move above 150. Strength in the Dollar appeared to suck the life out of gold over the past few days, leaving the precious metal unable to muster any kind of move. It is a good day for central bank aficionados. Later today, Andrew Bailey of the Bank of England, Christine Lagarde of the ECB and Fed Chair Jerome Powell are all set to speak at various events. Yesterday, a number of Federal Reserve members vaguely hinted that interest rates on the Dollar would continue to fall and that the central bank would adopt a more neutral stance. Far from concrete, but enough to move the FedWatch odds up to 70% for a quarter percent cut during the next meeting. Some interesting data came out of the latest JOLTS figures published on Tuesday. US job openings increased beyond expectations but perhaps more importantly, the quits rate increased from 1.9% to 2.1%, the first increase observed since May 2023. The data point indicates a sign of confidence among workers. The logic being that people are more willing to quit their jobs because they are now more confident of being able to secure a new one. The data helped push the S&P 500 and Nasdaq Composite to new record highs.
It was a predictably quiet end to the week last Friday, with US markets closing early and the rest of the world just as eager to get the weekend started. Despite only having the morning session to work with, US traders still managed to pump both the Dow and S&P 500 to record highs. All three major indices have had a stellar year so far and November was no exception. The Dow gained 7.5% last month, the Nasdaq Comp climbed 6.2% and the S&P 500 finished 5.7% in the black. The US election is now four weeks behind us, but the outcome continues to provide a steady source of developments for markets to digest. Trade wars, cabinet picks, various world leaders vying for position, etc… Nevertheless, the dust has at least partially settled and the monthly candles have just printed, so what is the verdict? First things first: the Dollar. The DXY pushed into ranges not seen since 2022 in the weeks following the result, and despite a sizeable pull back last week, the index is still up 1.8% in November. Strength in the Greenback took its toll on a number of currencies, but perhaps the Euro most of all, which lost almost 3% against the USD last month. Those wondering why the Japanese Yen is faring so well may consider the expected Bank of Japan rate hike in December. Second of all: gold. The precious metal faced severe selling pressure following the election as investors lost interest in the safe-haven narrative. Gold underwent major ups and downs in November before closing the month 3.4% in the red. Last but not least: crypto. Bitcoin shot up the second it became obvious that Donald Trump had secured the presidency and the elation lasted for much of the month. The original cryptocurrency gained a staggering $26,000 in November and remains coiled up below the all-important $100k mark. Shortly after the result, Gary Gensler, Chair of the Securities and Exchange Commission (SEC), submitted his resignation, to the collective cheer of many in the crypto community. The overwhelming sentiment is that things can only get better no matter who takes his place. The rest of the crypto markets also followed in Bitcoin’s footsteps, with valuations swelling across the board. Looking at the week ahead shows a relatively crowded economic calendar. Manufacturing and services PMI figures dominate the schedule on Monday and Wednesday. Federal Reserve Chair Jerome Powell is set to speak on Wednesday afternoon. Thursday provides a well-needed respite before Non-Farm Payrolls on Friday.
Thanksgiving market closures were supposed to be an exclusively US event, but it looks like other markets around the world were also keen for a day off. Very tame conditions all round yesterday. Given that the US has been the main driver of financial movements over the last few weeks, it is understandable that its absence induced a lack of direction. US markets will open back up later today, albeit briefly, before closing early again for Thanksgiving weekend. The Dollar currency index barely moved yesterday, closing the day just north of 106. A step down from recent highs that is causing many to ask whether the local top is in or if the Greenback still has room to push higher. Even commodities had nothing to contribute on Thursday, gold ending the day flat at $2,637 an ounce and oil prices edging half a Dollar higher to remain near yearly lows. Bitcoin had a similarly muted day, aimlessly oscillating around $95,000. Interestingly, Bitcoin dominance finally took a hit over the last week, falling from highs of 61% down to 58% currently. A little early to be calling for “alt season” but an interesting development nonetheless. On Wednesday, the US Bureau of Economic Analysis unveiled the latest round of price inflation data, which fell in line with predictions across the board. A 2.3% year-on-year increase in prices, not far off the Fed’s target of 2%. The exclusion of food and energy from the index provided a higher figure of 2.8% although this too was hardly eyebrow raising. The publication provoked almost no reaction in the FedWatch, a tool showing the odds of the next Fed decision based on the positioning of interest rate traders.
A number of events have shifted market sentiment early this week. The first is the nomination of Scott Bessent to the post of Treasury Secretary. Bessent is widely viewed as a credible bridge between Trump’s more aggressive stance on foreign trade and the traditionally tame approach to such matters. Although higher tariffs will still be pushed through, they are now expected to be imposed gradually, allowing for a more stable transition. Financial markets seemed to breathe a sigh of collective relief following the decision, leading the Dow to consecutive record highs over the past two sessions and the S&P 500 to a new all-time high on Tuesday. The second development is an apparent ceasefire in the Middle East. The agreement between Israel and Lebanon, brokered over the last few days, took hold at 4am local time today and requires both parties to stand down for an initial period of two months. The combined events drove a flight from Gold on Monday, causing the precious metal to fall an impressive 3.3%, or $90 per ounce. Oil prices also fell sharply, Brent Crude declining to $72 a barrel and WTI to $69. The sell-off even extended to the crypto markets, forcing Bitcoin down 5% on Monday after a failed attempt to breach $100k. With all drama, one could be forgiven for overlooking the FOMC minutes released last night. The transcript of the meeting held on the 7th of November revealed a level of uncertainty among board members. Mixed view were expressed; the path forward not so clear. The Fed will likely maintain a wait-and-see approach and sees no reason to rush forward with further rate cuts. The central bank does in fact have a decent amount of room to manoeuvre and seems unwilling to make any rash decisions. The next rate decision is still three weeks away and current CME odds favour a 25 bps cut, although no change is still very much on the cards. Later today, the Fed’s preferred inflation gauge will be released in the form of the PCE price index and members will no doubt pore over the data with a fine-tooth comb. US markets are closed on Thursday in observance of Thanksgiving. They will also close early on Friday.
US indices enjoyed a strong end to the week last Friday. The Dow in particular gained over 400 points, rising to a record high close as a number of stocks across the board outperformed. For once, tech stocks were not the driving force behind the push; Alphabet Inc (GOOGL) and Nvidia (NVDA) both ended the week on the back foot, losing 1.7% and 3.2% respectively. The Dow, S&P 500 and Nasdaq Comp all ended the week in the black, although the latter two failed to break new ground. Whatever accolades can be attributed to US indices, they pale in comparison to what we are currently witnessing in the mighty US Dollar. The DXY ended the week with a bang on Friday, closing around 107.5 but not before testing the waters around 108. The index now sits at a two-year high and competing currencies are really feeling the pressure. The Euro plummeted all the way down to $1.033 on Friday before staggering back above $1.04 for the day. Poor manufacturing data from Germany and France did their part to weigh on the common currency but a more immediate concern is the battle of interest rates. The ECB has proven all too willing to lower rates on the Euro in a bid to combat lacklustre growth whereas the Fed on the other hand has been surprisingly reticent. Next rate decisions are set for the 12th and 18th of December respectively. Another major factor moving forward is the incoming Trump presidency, which is expected to implement more protectionist policies and a firmer stance on international trade, further bolstering the Dollar, at least in the short term. Gold enjoyed a decent rally on Friday, gaining 1.7% to close back above $2,700 an ounce. The safe-haven trade once again working its magic. For now however, the spotlight is firmly on Bitcoin, which remains tantalisingly close to six figures.
Barring those who have been living under a rock over the last couple of months, traders may have noticed the meteoric rise in the US Dollar since the end of September. The Yen, the Mexican Peso and the Euro in particular have been getting hammered, the latter even threatening to reach parity with the USD. So why is this happening? “Trump” is the first thing that will come to the minds of many, and certainly explains part of what is going on, but there are other factors at play here. The Dollar had in fact been falling consistently since June, losing over 5% on the DXY before undergoing a violent reversal at the end of September. A major reason for this decline was simple interest rate positioning. Markets were expecting the Fed to rapidly lower interest rates on the Dollar due to a number of worrying economic data points earlier in the year. Gradually, markets realised these points were overplayed and rate cuts were not that necessary after all. The Fed has indeed been remarkably careful in lowering rates so far this year. Essentially, the Dollar was severely oversold. Eventually, the pendulum peaked and began to swing back. It just so happened that this coincided with a growing sentiment that a Trump presidency was once again on the cards. Betting markets painted a much clearer picture than the polls this year and it turns out they were right on the money. At this point, let us remind ourselves that the Euro makes up the majority of the DXY weighting, 57% in fact. So what is going on in Europe? The problems in the US economy may indeed have been overstated, but the same cannot be said for the European economy. First of all, Germany and France, the Eurozone’s largest contributors, continue to exhibit poor manufacturing figures as well as non-existent investor confidence. The European Central Bank is now on the difficult path of having to reduce interest rates in an effort to stimulate growth, on a currency that has already devalued significantly in recent months. On the other side of the Atlantic, the Fed is under no such pressure to reduce rates as quickly, having a lot more room to manoeuvre within a more robust economy. Rates on the Dollar are currently 4.75%, whereas the ECB has cut rates on the Euro down to 3.4%. Not a huge difference, but it is looking increasingly likely that this gap will widen as opposed to narrow. A growing interest rate differential will only put more pressure on the common currency, further devaluing the Euro and bolstering the Dollar. With that out of the way, what about President Donald Trump? Why would a Trump presidency strengthen the Dollar? In a nutshell: protectionism. Protectionist policies will increase tariffs on imported goods, which will likely reduce the amount of goods imported into the US, which affects the trade balance. Currently, the US has a trade deficit of about $80 billion. If the proposed measures are enough to shift this into a trade surplus, this will increase demand for the Greenback as the rest of the world needs the Dollar to pay for US products. Tariffs on foreign goods would also make domestic products more attractive, further favouring American businesses and the US economy in general. A minor caveat is that protectionist policies over a long enough time-frame can result in higher prices, potentially leading to inflation, which would devalue the Dollar. A much larger caveat lies in how other nations are likely to respond to additional tariffs, potentially leading to trade wars. What’s next for the Dollar? President Trump will inherit a very different economy from the one he got in 2017, so looking at historical data can only be so enlightening. The response of the likes of Europe, Mexico and China are equally difficult to predict. The Euro has only dipped below parity once since 2002 and even then it only stayed there for a couple of months. Place your bets.
