Rate Hike Expectation Boosts Dollar – Global Currency Review and Forecast

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Dollar Holds its Gains.

The Dollar Index* held above 100 last week as President-elect Donald Trump began assembling his cabinet. Markets fully anticipate an interest rate hike later this month from the Federal Reserve. Fed Presidents have been relatively silent the past week and have said nothing to disabuse markets of that notion.

On Friday, the US. Bureau of Labor Statistics reported that the unemployment rate dropped to 4.6%, a seven year low. The non farm payroll number was also in line with expectations. Prior to each Fed meeting this year Janet Yellen and Fed officials have insisted that the Fed was about to raise rates, considered a rate hike appropriate, a rate hike was on the table and that the economy and labor markets were ‘solid”. Yet, the Fed has not raised rates at all in 2016.

Since a general consensus among market participants has emerged that the Fed will raise interest rates at its December meeting, markets should have priced in such a move. Market participants will focus closely on the Fed’s forward guidance regarding the anticipated path of future rate increases. St. Louis Fed President, James Bullard has noted through the year that one rate hike should be sufficient for the next 18-24 months. Fed Chair Janet Yellen, in contrast, has been talking all year about a “gradual pace of rate hikes” Despite her calls for such rate hikes none have materialized this year.

The rising Dollar Index may not be enough to forestall a rate hike later this month, but it may ward off further hikes if the Index remains elevated. A strong dollar is deflationary as imports become less expensive. The Fed has stated that it wants more price inflation having set an inflation gold target of 2% that has not yet been met. Recent inflation readings, however, show that inflation is ahead of that 2% target.

While considering future rate hikes, the Fed will need to pay close attention to Donald Trump’s as of yet nebulous plans to build U.S. infrastructure and the borrowing costs they may entail.

Emerging markets currencies and all other currencies continue to weaken as the dollar soars. The Indian Rupee hit all time lows in the aftermath of Prime Minister Modi’s shock announcement that Indian Rupee 500 and 1000 notes would cease to be legal tender. Cash shortages in India have been reported and trade has slowed, in some instances, to a standstill.

The British Pound rallied this week on hopes that there will not be a ‘hard Brexit”. The Pound finally moved over $1.25 and traded at $1.26 on Friday morning. The Euro inched up to $1.06.

Gold and Silver

Gold continued to fall this week and was trading in the $1170-$1175 range. Gold had risen sharply as soon as it became clear that Donald Trump was going to win the Presidency. Gold touched a high of $1342 an ounce soon after the election. That rally was short lived as the price of gold has fallen for three weeks in a row to nine month lows.

Gold was trading at $1174 an ounce Friday morning, down about $30 from last Friday morning.

Year to Date Dollar Index, Oil and Gold Prices

#  YTD december 1 2016 gold oil dollar bgasc

Silver stabilized this week after falling sharply the past two weeks. The price of silver has fallen from about $2 since the election, or about 11%.

The price of silver late Friday morning was at $16.51 an ounce, up about five cents from last Friday morning.

Year to Date Dollar Index, Oil and Silver Prices

# silver oil and dollar YTD december 1 2016 bgasc

Oil

Oil rose sharply last week on the announcement of a OPEC oil production cut/freeze. Oil rose the first six months of 2016 and leveled off during the summer,trading on news of stockpiles and the possibility of output freeze talks. OPEC’s decision to cut output had pushed oil back to over $50 a barrel. Oil was trading at $51.11 Friday morning.

What’s next?

Markets participants be on alert for any economic reports that are out of the ordinary that might derail the Fed’s December rate hike.

Here are some economic reports that probably will have little impact on the gold, silver and currency markets this week:

Dec 5 ISM Services Nov
Dec 6 Productivity-Rev. Q3
Dec 6 Unit Labor Costs – Rev. Q3
Dec 6 Trade Balance Oct
Dec 6 Factory Orders Oct
Dec 7 MBA Mortgage Index 12/03
Dec 7 Crude Inventories 12/03
Dec 7 Consumer Credit Oct
Dec 8 Initial Claims 12/03
Dec 8 Continuing Claims 11/26
Dec 8 Natural Gas Inventories 12/03
Dec 9 Mich Sentiment Dec
Dec 9 Wholesale Inventories Oct

* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.

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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.