The dollar index (DXY00) experienced a decline of -0.41% on Friday. This drop was largely influenced by the August core PCE price index report, which is the Federal Reserve’s preferred measure of inflation. The report met expectations, suggesting that the Fed may continue to ease monetary policy. Further losses for the dollar were observed after the University of Michigan’s US September consumer sentiment index was unexpectedly revised down to a four-month low.
Despite these losses, the dollar’s decline was somewhat mitigated by stronger-than-expected reports on August personal spending and income, indicating economic resilience that supports the dollar. Additionally, hawkish remarks from Richmond Fed President Tom Barkin bolstered the dollar’s outlook, as he noted that the uncertainty surrounding the economic outlook has begun to dissipate for US companies.
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In August, personal spending rose by +0.6% month-over-month, surpassing expectations of +0.5% and marking the largest increase in five months. Personal income also increased by +0.4% month-over-month, exceeding the anticipated +0.3%.
The core PCE price index for August rose by +0.2% month-over-month and +2.9% year-over-year, aligning with expectations. However, the University of Michigan’s September consumer sentiment index was unexpectedly revised down to a four-month low of 55.1, compared to expectations of no change at 55.4.
Moreover, the one-year inflation expectations were adjusted lower to 4.7% from the previously reported 4.8%. Similarly, the five-to-ten-year inflation expectations were revised down to 3.7% from 3.9%.
Richmond Fed President Tom Barkin expressed optimism, stating that the uncertainty affecting the economic outlook has started to lift, with limited risks of further deterioration in employment and inflation. Currently, markets are pricing in a 90% chance of a -25 basis point rate cut at the upcoming FOMC meeting on October 28-29.
In the foreign exchange market, EUR/USD (^EURUSD) rose by +0.32% on Friday. The weaker dollar provided support for the euro, which also benefited from a stronger-than-expected monthly report from the ECB on inflation expectations, signaling a hawkish stance for ECB policy.
The euro’s strength is further supported by central bank divergence, as the ECB appears to be nearing the end of its rate-cutting cycle, while the Fed is expected to implement two more rate cuts by year-end. The ECB’s August one-year CPI expectations unexpectedly rose to 2.8%, up from 2.6% in July, contrary to expectations of a decline to 2.5%. The three-year CPI expectations remained unchanged at 2.5%, also stronger than anticipated.
Swaps indicate a mere 1% chance of a -25 basis point rate cut by the ECB at the October 30 policy meeting. Meanwhile, USD/JPY (^USDJPY) fell by -0.20% on Friday. The yen rebounded from a 1.75-month low against the dollar, aided by the dollar’s weakness following the US inflation report.
Japan’s September Tokyo CPI remained unchanged from August at +2.5% year-over-year, falling short of expectations for an increase to +2.8%. Additionally, the CPI excluding fresh food and energy dropped to +2.5% year-over-year from +3.0% in August, weaker than the anticipated +2.9%.
In the commodities market, December gold (GCZ25) closed up +37.90 (+1.01%), while December silver (SIZ25) rose by +1.542 (+3.42%). Precious metals rallied sharply on Friday, with December silver reaching a contract high and nearest-futures posting a 14-year high.
This surge in precious metals can be attributed to the weaker dollar and the benign inflation report on US August core PCE prices, which may encourage the Fed to continue cutting interest rates. Silver prices were also buoyed by the positive personal spending report, indicating economic growth and increased demand for industrial metals.
Safe-haven demand for precious metals remains strong due to uncertainties surrounding US tariffs, the potential for a government shutdown, and expectations of further Fed rate cuts. Additionally, President Trump’s criticisms of Fed independence and the ongoing geopolitical risks have heightened demand for gold.
Despite the bullish environment, Friday’s hawkish comments from Richmond Fed President Tom Barkin tempered gold’s appeal, as he noted limited risks of further deterioration in employment and inflation. Furthermore, a rally in stocks has reduced some safe-haven demand for precious metals.
Nonetheless, precious metals continue to benefit from fund buying in ETFs, with gold holdings reaching a nearly three-year high and silver holdings also hitting a three-year peak.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
