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Dollar Declines Amidst Shifting Economic Landscape

Unveiling the Factors Behind the Dollar’s Recent Decline

The Dollar Index (DXY00) experienced a slight dip of -0.11% on Monday, reflecting a complex interplay of economic factors.

One of the main reasons for the decline was a drop of -3 basis points in the 10-year T-note yield. This decrease affected the dollar’s interest rate differentials. Additionally, the NAHB U.S. housing market index released on Monday showed a worrisome trend, with a significant -5 point drop to a five-month low of 45. This was much lower than the expected -1 point decrease to 49. The decrease in builder confidence indicates the possibility of a slowdown in home-building activity in the coming months.

Despite these pressures, the dollar did receive some support. Market expectations suggest that the Federal Open Market Committee (FOMC) will maintain a hawkish stance at the upcoming meeting, even though another rate hike is not expected. The FOMC’s commitment to this stance is based on the fact that inflation and the broader economy have not yet shown significant signs of slowing down.

Looking ahead, the markets currently predict a 31% probability of a +25 basis point rate increase at the next FOMC meeting on November 1, with a 14% chance for a similar hike at the subsequent meeting on December 13. Beyond that, there is speculation about potential rate cuts in 2024 in response to anticipated economic deceleration.

In the foreign exchange market, the EUR/USD (^EURUSD) remained relatively stable on Monday, while the USD/JPY (^USDJPY) saw a small increase of +0.10%. The Japanese markets were closed on Monday, but they are closely monitoring the Bank of Japan’s policy meeting scheduled for Friday.

In the precious metals market, October gold (GCV3) experienced a gain of +0.38%, while December silver (SIZ23) rose by +0.48%. These precious metals were supported by the slightly weaker dollar and the -3 basis point decline in the 10-year T-note yield. However, silver faced challenges from higher German and UK bond yields and concerns about global economic growth. It’s worth noting that gold is also feeling pressure from liquidation due to a decline in gold holdings in exchange-traded funds (ETFs) to a 3-1/3 year low.

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