The dollar index DXY surged to a 1.5-year high on Friday, closing up +0.22%. The rally was driven by weakness in stocks, which increased demand for dollar liquidity, and higher T-note yields, with the 10-year yield reaching a 4-week high of 5.172%. Hawkish comments from Federal Reserve officials, including Chicago Fed President Austan Goolsbee, Boston Fed President Susan Collins, and San Francisco Fed President Mary Daly, also supported the dollar. However, gains were limited after the US October PPI rose less than expected.
US October PPI final demand increased +0.3% month-over-month and +6.5% year-over-year, missing expectations of +0.4% and +6.6%, respectively. Excluding food and energy, PPI rose +0.3% month-over-month and +5.0% year-over-year, matching forecasts. Fed officials emphasized the need for further tightening, with Goolsbee noting that the Fed 'has work to do' on inflation, while Daly stated that 'We're going to need to, in all likelihood, raise interest rates.' Markets now price a 100% chance of a +25 bp rate hike at the December 8-9 FOMC meeting.
The EUR/USD fell by -0.06%, while the yen recovered from a 2.25-month low against the dollar. Concerns over potential intervention by Japanese authorities if the yen weakens past 160 per dollar sparked some short covering. The yen initially dropped as T-note yields rose but found support after the Nikkei Stock Index rallied to a 1-week high, reducing safe-haven demand. The market also prices an 84% chance of a +25 bp BOJ rate hike at its December 18 meeting.
Precious metals ended mixed, with December COMEX gold (GCZ26) up +1.00 (+0.03%) and December COMEX silver (SIZ26) down -0.944 (-1.89%). The dollar's rally to a 1.5-year high weighed on metals, as did hawkish Fed comments. However, gold prices recovered from early losses after the weaker-than-expected PPI data and safe-haven demand following reports of Iran launching drones toward a US base in Bahrain. Recent fund support for precious metals remains bullish, with long holdings in gold ETFs reaching a 4.25-year high on October 21, though those holdings have since declined.