Fed's Mixed Signals Leave Dollar at a Crossroads—Here's What Traders Need to Know

The dollar index just hit a fresh 5.5-month peak, but don’t get too comfortable—the rally is shaky as hell right now.

On one side, you’ve got the hawkish brigade. Boston Fed’s Susan Collins and Dallas Fed’s Lorie Logan basically said “rates stay put,” which normally pumps the dollar. Plus, Michigan consumer sentiment got revised UP to 51.0 (beat the 50.6 expect), and equity markets are getting wrecked this week, which always drives safe-haven dollar demand.

But here’s where it gets messy: New York Fed President John Williams just dropped a dovish bomb, saying there’s room for rate cuts in the “near term.” The market’s now pricing 64% odds of a 25bp cut at the December 9-10 FOMC meeting. That’s a big deal.

The data’s also softer than expected. US manufacturing PMI came in at 51.9 (near the 52.0 forecast, but still cooling). More interesting: inflation expectations actually fell—1-year expectations dropped to 4.5% (from 4.7%), and 5-10 year sank to 3.4% (from 3.6%). This easing inflation narrative is actually bearish for the dollar long-term.

Currency Watch:

• EUR/USD cratered to 2-week lows as eurozone manufacturing PMI collapsed to 49.7 (a 5-month contraction low). The geopolitical Ukraine chaos didn’t help either.
• USD/JPY dropped 0.71% as Japan’s Finance Minister Katayama threatened FX intervention to defend the yen. Japanese trade data surprised to the upside (exports +3.6% y/y), giving the yen real support.

Precious Metals: Gold is up slightly (+0.25%) on safe-haven flows and Williams’ dovish comments, but silver got smashed (-1.76%) on manufacturing weakness concerns. China just added gold to its PBOC reserves for the 12th straight month (now at 74.09M oz), which is quietly bullish for gold long-term.

Bottom line: The dollar’s rally is real but fragile. Too many Fed officials talking too many different languages right now.