Dollar Drops as Gold Hits New High on Fed Rate Cut Hopes

Dollar Index Faces Pressure Amid Expectations of Fed Rate Cuts

The dollar index (DXY00) experienced a decline of -0.27% on Monday, reflecting ongoing pressure from several factors. The Federal Reserve is anticipated to reduce the federal funds target range by 25 basis points during the upcoming Tue/Wed FOMC meeting. This expectation has contributed to the dollar's weakness, as investors anticipate a more dovish stance from the central bank.

Additionally, the S&P 500's rally to a new record high on Monday reduced demand for the dollar, as liquidity flowed into equities rather than currency markets. The market is also pricing in a 100% chance of a 25-basis-point rate cut at the next meeting, with a 5% probability of a larger 50-basis-point reduction. Looking ahead, there is an 82% chance of another 25-basis-point cut at the October 28-29 meeting, resulting in a projected total of 68 basis points in cuts by year-end, bringing the federal funds rate down to 3.65% from its current level of 4.33%.

The dollar's losses were further exacerbated by the US September Empire manufacturing survey, which showed a significant drop in general business conditions to a three-month low of -8.7, falling well below expectations of 5.0. This data reinforced concerns about the U.S. economy and added to the bearish sentiment toward the dollar.

Euro Gains as ECB Signals End of Rate-Cutting Cycle

The euro (EUR/USD) rose by +0.30% on Monday, benefiting from the dollar's weakness. The European Central Bank (ECB) is seen as nearing the end of its rate-cutting cycle, with ECB Governing Council member Kocher stating that the central bank is "or very close to" concluding its rate reductions. This divergence between the ECB and the Fed has supported the euro, as markets perceive the ECB as less likely to cut rates in the near term.

However, gains in the euro were tempered by mixed economic data. The German August wholesale price index fell by -0.6% month-over-month, marking the largest decline in a year. This development was viewed as a dovish signal for ECB policy. Additionally, Fitch Ratings' downgrade of France’s credit rating to A+ from AA- due to rising public debt and political instability weighed on the euro. Concerns over the continuation of the Russia-Ukraine conflict also negatively impacted the euro, as Russia announced a pause in negotiations with Ukraine.

Yen Benefits from Dollar Weakness and Lower Bond Yields

The USD/JPY pair declined by -0.24% on Monday, supported by the dollar's weakness and lower Treasury note yields. However, trading activity was subdued due to Japan’s Respect-for-the-Aged Day holiday, which may have exaggerated the yen’s movements. Political uncertainty in Japan, following the resignation of Prime Minister Ishiba after recent election results, has also affected the yen. The loss of majority control by the ruling Liberal Democratic Party could lead to more expansionary fiscal policies, which may weaken the yen in the long term.

Precious Metals Rally on Geopolitical Risks and Rate Cut Expectations

Precious metals saw strong gains on Monday, with December gold closing up +32.60 (+0.88%) and December silver rising +0.132 (+0.31%). Gold reached a contract high, while the nearest-futures (U25) gold hit an all-time high of $3,686.40 per ounce. Silver also posted a contract high, with the nearest-futures (U25) hitting a 14-year peak.

The weaker dollar and lower global bond yields provided a supportive environment for precious metals. Additionally, expectations of at least a 25-basis-point rate cut by the Fed at the upcoming FOMC meeting and the possibility of three rate cuts by year-end have bolstered demand for gold and silver as safe-haven assets. Geopolitical tensions in Europe, including Fitch Ratings’ downgrade of France’s credit rating, have further driven investors toward precious metals.

Despite these positive factors, gains in precious metals were somewhat limited by the S&P 500’s record-high performance, which reduced safe-haven demand. Hawkish comments from ECB officials, such as Kocher’s indication that the rate-cutting cycle is nearing an end, also weighed on prices. For silver, weak Chinese economic data, including industrial production, home prices, and unemployment figures, signaled a weaker economy and negatively impacted demand for industrial metals.

Economic Data from China Shows Signs of Slowdown

China’s August data revealed signs of economic weakness. Industrial production grew by +5.2% year-over-year, slightly below the expected +5.6%. Retail sales increased by +3.4%, also underperforming expectations of +3.8%. The surveyed jobless rate unexpectedly rose to 5.3%, reaching a six-month high. Meanwhile, new home prices fell by -0.3% month-over-month, marking the 27th consecutive month of declines.

Ongoing Market Dynamics and Investor Sentiment

Investors remain focused on central bank actions, geopolitical developments, and macroeconomic data as they navigate a complex market environment. The continued support for precious metals from fund buying in ETFs—gold holdings hitting a 2.25-year high and silver reaching a 3-year high—suggests sustained interest in these assets as a hedge against uncertainty.

As markets continue to monitor the Fed’s policy path and global economic trends, the outlook for currencies, commodities, and equities remains closely tied to evolving macroeconomic conditions.