Dollar Strengthens as FOMC Announces Hawkish Pause in Interest Rate Hiking

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US Dollar Index Climbs to 4-Week High, Influenced by FOMC Decision

The US Dollar Index (DXY00) experienced a 0.14% increase on Wednesday, reaching a 4-week high. This rise in the dollar can be attributed to the Federal Open Market Committee’s (FOMC) announcement of a pause in its interest rate hiking cycle. However, the dollar’s gains were tempered by a decrease in T-note yields and the release of weaker-than-expected economic reports, which are considered dovish signals for Federal Reserve (Fed) policy.

The economic news in the United States on Wednesday presented a mixed picture. On the positive side, job openings, as measured by the JOLTS report for September, unexpectedly rose by 53,000 to a 4-month high of 9.553 million, surpassing expectations of a decline to 9.400 million. Conversely, the October ADP employment change increased by 113,000, falling short of the anticipated 150,000. Additionally, the October ISM manufacturing index saw an unexpected decrease of 2.3 points to 46.7, missing the expected stability at 49.0.

The FOMC made a unanimous decision to maintain the federal funds target range at 5.25% to 5.50%. The committee expressed concerns about “tighter financial and credit conditions for households and businesses” that could weigh on economic activity, hiring, and inflation. They also emphasized their consideration of the cumulative impact of tightening monetary policy, along with the lag effects on the economy and inflation, in determining the need for “additional policy firming” to achieve the goal of returning inflation to 2% over time.

Federal Reserve Chairman Jerome Powell’s comments appeared slightly dovish as he stated, “Given how far we have come, along with the uncertainties and risks we face, the FOMC is proceeding carefully.”

Impact on Major Currency Pairs

EUR/USD (^EURUSD) posted a 0.17% decline on Wednesday, reaching a 2-week low, influenced by the stronger dollar. The FOMC’s announcement of a pause in its interest rate hiking cycle put pressure on the euro.

USD/JPY (^USDJPY) experienced a 0.61% decrease, representing a minor recovery for the yen from its 1-year low against the dollar. The yen’s rebound followed comments by Masato Kanda, Japan’s top currency official, who stated that Japan is prepared to take necessary actions in the forex market. The yen was also buoyed by a significant decline in T-note yields, while the 10-year JGB bond yield reached a 10-year high at 0.974%.

Despite the mixed economic news, the Japanese yen received a boost as the October Jibun Bank manufacturing PMI was revised upward by 0.2 points to 48.7. However, the yen faced some downside pressure as the Bank of Japan (BOJ) conducted an unscheduled bond-buying operation, purchasing 300 billion yen of 5 to 10-year debt and 100 billion yen of 3 to 5-year securities.

Precious Metals Under Pressure

December gold (GCZ3) closed down by 0.34% (-6.80), while December silver (SIZ23) recorded a decrease of 0.71% (-0.162). These losses in precious metals were primarily attributed to the rally in the US Dollar Index, which reached a 4-week high. Additionally, silver prices were affected by disappointing manufacturing reports in both China and the United States. The unexpected declines in the China October Caixin manufacturing PMI and the US October ISM manufacturing index signaled reduced demand for industrial metals.

These economic developments highlight the dynamic and interconnected nature of the global financial landscape, where changes in one part of the world can have far-reaching effects on various asset classes, including currencies and commodities.