The dollar index (DXY00) declined 0.28% on Monday, consolidating below the previous Friday’s two-week high. The greenback came under pressure after U.S. Treasury Secretary Bessent remarked that the Federal Reserve traditionally avoids raising interest rates in response to a supply shock, hinting at a potential policy divergence with Fed Chair Warsh. Additionally, a rally in the Chinese yuan to a 3.5-year high further undermined the dollar.
However, the dollar’s losses were capped by a more than 2% surge in WTI crude oil to a one-week high, which elevated inflation expectations and increased the likelihood of a Fed rate hike—a supportive factor for the currency. Weaker equity markets also spurred some liquidity-driven demand for the dollar, while rising Treasury yields widened interest rate differentials in the dollar’s favor. Residual support stemmed from Friday’s hawkish commentary by Fed Chair Warsh, who warned that inflation is not meaningfully decelerating and reiterated the commitment to the 2% target. Consequently, market-implied odds of a rate hike at next month’s FOMC meeting jumped to 65% from 36% prior to Warsh’s remarks.
Chinese economic data painted a mixed picture. The August manufacturing PMI rose 0.6 points to 49.8, exceeding the 49.5 forecast, while the non-manufacturing PMI held steady at 49.0, missing expectations for an increase to 49.4.
Markets are currently pricing in a 65% probability of a 25-basis-point rate hike at the upcoming FOMC meeting on September 15-16.
EUR/USD (^EURUSD) advanced 0.29% on Monday, benefiting from broad dollar weakness. The euro’s upside was tempered, however, after German August consumer prices rose less than anticipated, a dovish signal for ECB policy. Conversely, the sharp rise in crude oil prices heightened inflation risks, potentially compelling the ECB to tighten policy further. Moreover, the 10-year German Bund yield climbing to a 15-year high of 3.327% bolstered the euro’s yield appeal.
German August CPI (EU harmonized) increased 0.2% month-over-month and 2.9% year-over-year, falling short of the estimated 0.3% and 3.1% respectively.
Traders see a 99% likelihood of a 25-basis-point ECB rate hike at the September 10 policy meeting.
USD/JPY (^USDJPY) slipped 0.19% as the yen strengthened on signs of resilience in the Japanese economy. July industrial production unexpectedly rose, and retail sales posted their largest monthly gain in six months.
Yen gains were checked by the jump in crude oil prices, which hurts Japan’s trade balance given its reliance on energy imports for over 90% of its needs. Higher U.S. Treasury yields also weighed on the currency. The yen continues to face structural headwinds from wide interest rate differentials, with the BOJ’s policy rate at 1.00% compared to the Fed’s 3.50%-3.75% target range.
Underlying support for the yen persists on growing expectations for a BOJ rate hike in September or October. The Japanese government favors tightening to support the currency and mitigate import-driven inflation. Fears of further coordinated U.S.-Japan intervention also provide a floor. Markets are assigning an 84% chance of a 25-basis-point BOJ hike at the September 18 policy meeting.
Japan’s July industrial production unexpectedly rose 0.1% month-over-month, defying forecasts for a 0.7% decline.
July retail sales climbed 2.4% month-over-month, surpassing the 1.6% estimate and marking the strongest increase in six months.
October COMEX gold (GCV26) settled down $47.90 (-1.07%), while September COMEX silver (SIU26) fell $0.774 (-1.16%).
Precious metals extended Friday’s sharp losses, with gold hitting a 1.5-week low and silver a one-week low. Rising global bond yields pressured the complex. The surge in crude oil amplified inflation expectations, raising the prospect of further central bank tightening—a negative for non-yielding assets. Hawkish comments from Fed Chair Warsh on Friday, which lifted the probability of a September Fed hike to 65% from 36%, continued to weigh on sentiment.
Investment demand offers a supportive backdrop; long holdings in gold ETFs reached a 4.25-month high last Friday, while silver ETF holdings climbed to a five-month high the prior Tuesday.
Sustained central bank buying remains a pillar of support for gold. Data released August 7 showed the PBOC increased its gold reserves by 640,000 ounces to 76.08 million troy ounces in July, marking the twenty-first consecutive month of accumulation.