by Raul de Frutos on DECEMBER 7, 2015
Last Thursday was a big day in currency markets. The dollar fell sharply against other currencies while the euro saw its value rise.
The European Central Bank disappointed investors after presenting a package of stimulus measures smaller than expected. The ECB surprised the market as many expected the central bank to bring stronger stimulus measures, including a larger cut to the deposit rate which was cut only by 10 basis points to 0.3%, quite a smaller cut than what most investors expected.
On top of the disappointing stimulus measures, the Federal Reserve said that rate increases will come but they are likely to follow a gradual path.
The Fed sees a strong dollar and low inflation as contributing factors to proceed gradually on rate hikes. Therefore, although a rate hike is still expected in December, the diverging monetary policy between the US and Europe seems to have narrowed after the talks.
In theory, higher borrowing costs domestically make the dollar more attractive to investors seeking yields than other currencies. Based on how markets reacted on Thursday, investors might have lost a bit of enthusiasm on the dollar after the Fed and ECB talks, which could throw some cold water on the dollar’s current bull market giving some short-term support to metal prices.
What This Means For Metal Buyers
So far, this is only a one-day decline and buyers need to focus on the big picture. Longer term, things are still pointing to a strong dollar and depressed commodity prices. A smaller stimulus by the ECB doesn’t seem to be enough to stop the dollar from rising as we move forward, but it is something to keep an eye on.