Dollar Index Hits 1.5-Year High as Crude Oil and Fed Talk Lift Greenback

The dollar index climbed to a 1.5-year high on Monday, closing up 0.37%, as a rally in crude oil and hawkish remarks from a Federal Reserve official pulled money into the US currency, Nasdaq reported. WTI crude rose more than 2% during the session, lifting inflation expectations that could push the Fed toward tighter policy.

Cleveland Fed President Beth Hammack said inflation pressures are broad-based rather than concentrated, and that restrictive policy is needed to bring inflation back to 2%, per Nasdaq. Traders now assign a 22% probability to a 25 basis point rate hike at the FOMC meeting on October 27-28.

Also read: Chipmakers and Bitcoin Lift Stocks as Crude Sinks 4%

Key facts

• The dollar index (DXY00) finished Monday up 0.37% at a 1.5-year high.
• WTI crude rose more than 2% on Monday, raising inflation expectations.
• EUR/USD fell 0.39% to a 17-month low; USD/JPY rose 0.23% as the yen touched a two-week low.
• Markets price a 22% chance of a 25 bp Fed hike on October 27-28, a 12% chance of an ECB hike on October 29, and a 9% chance of a BOJ hike on October 30.
• December COMEX gold closed down 25.70 (-0.61%) and silver closed down 0.535 (-0.88%).

Euro and yen pressured by energy costs

EUR/USD fell to a 17-month low as the dollar’s advance weighed on the single currency. ECB Governing Council member Yannis Stournaras said the central bank may raise rates again to curb inflation but should not rush, hinting that an increase this month is less likely than one in December. Higher crude prices are also negative for the euro area, which imports most of its energy.

The yen weakened to a two-week low against the dollar, with USD/JPY up 0.23%. Nasdaq reported that trading volume was below normal because Japanese markets were closed Monday for the Health Sports Day holiday. Japan imports more than 90% of its energy, so costlier crude weighs on the country’s economy and currency.

Also read: Dollar Steadies as Stocks Rally; Gold Hits 3.25-Month High on Debasement Fears

Gold and silver slip as dollar strengthens

December COMEX gold (GCZ26) settled down 25.70, or 0.61%, and December silver (SIZ26) closed down 0.535, or 0.88%. The dollar’s move to a 1.5-year high and the 2% crude rally both pressured precious metals by raising the prospect of tighter policy from central banks.

Offsetting that pressure, gold ETF long holdings reached a four-year high last Thursday and silver ETF longs hit a 6.5-month high on September 22. China’s PBOC added 740,000 ounces of gold in September, taking reserves to 77.47 million troy ounces — the largest monthly increase in three years and the twenty-third straight month of additions.

Why it matters

A firm dollar raises the cost of dollar-denominated imports for households and businesses outside the United States and tightens financial conditions for emerging-market borrowers. It also makes US exports less competitive and weighs on the overseas earnings of American multinationals. For commodities priced in dollars, the move is a direct headwind, which showed up in Monday’s gold and silver settlements.

What to watch

The October 27-28 FOMC meeting is the next scheduled decision point, followed by the ECB on October 29 and the BOJ on October 30. Crude prices remain the key input, with a further rise likely to reinforce the inflation expectations that pushed the dollar higher this week. This article is not financial advice, and currency and commodity markets are volatile and uncertain.

Written by

Katherine Wells

Katherine Wells covers forex and currency markets for StockPil, tracking the macro trends that move exchange rates.

Source: Nasdaq