Dollar Drops on Dovish Fed Comments and Heightened China Trade Tensions
The dollar index (DXY00) on Friday fell by -0.58%. The dollar was under pressure Friday as T-note yields retreated on dovish comments from Fed Governor Christopher Waller and St. Louis Fed President Alberto Musalem, who expressed their support for additional Fed interest rate cuts. Losses in the dollar accelerated on Friday after US-China trade tensions escalated, which could weigh on economic growth, following President Trump’s threat of a “massive increase” in tariffs on Chinese goods.
The ongoing shutdown of the US government is bearish for the dollar as the shutdown entered its second week on Monday. The longer the shutdown is maintained, the more likely the US economy will suffer, a negative factor for the dollar.
The University of Michigan US Oct consumer sentiment index fell -0.1 to a 5-month low of 55.0, stronger than expectations of 54.0.
The University of Michigan US Oct 1-year inflation expectations unexpectedly fell -0.1 to 4.6%, versus expectations of no change at 4.7%.
Fed Governor Christopher Waller said, “The labor market is weak,” and he’s open to quarter-point interest rate cuts at the coming FOMC meetings.
St. Louis Fed President Alberto Musalem said, “Looking ahead, I am open-minded about a potential further reduction in interest rates to provide further insurance against labor market weakening.”
The markets are pricing in a 97% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.
EUR/USD (^EURUSD) on Friday rose by +0.39%. The euro moved higher on Friday due to dollar weakness. Also, hawkish comments from ECB Governing Council members Nagel and Kazaks boosted the euro when they signaled that current ECB interest rates are appropriate. Political uncertainty in France is limiting gains in the euro, although President Macron said that he’ll name a new prime minister by Friday evening, which could avoid the need to call for a snap election.
ECB Governing Council member and Bundesbank President Nagel said “the bar is rather high” to alter his assessment that the current ECB monetary policy stance is appropriate.
ECB Governing Council member Kazaks said we are about neutral on ECB rates as inflation remains contained and the current 2% rate is appropriate.
Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
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