Dollar Strengthens Against Majors as US Economic Data Beats Expectations

The U.S. dollar index (DXY00) rebounded from a three-month low today, rising 0.05%, driven by short covering amid stronger-than-expected domestic economic data. Weekly jobless claims, the August Philadelphia Fed business outlook survey, and July leading indicators all exceeded forecasts, bolstering sentiment toward the greenback. Additionally, a 2% surge in WTI crude oil prices to a one-month high lifted inflation expectations, potentially encouraging the Federal Reserve to maintain a tighter monetary stance—further supporting the dollar.

The dollar initially extended losses from Wednesday but reversed course today due to carryover effects from the previous session, which saw the U.S. Treasury announce enhanced liquidity measures and plans to expand buybacks of long-dated bonds. However, dovish remarks from San Francisco Fed President Mary Daly tempered bullish momentum briefly, as she noted that there is currently no clear indication pointing to the need for preemptive rate hikes.

U.S. weekly initial unemployment claims unexpectedly dropped by 6,000 to 206,000, defying expectations of an uptick to 210,000 and signaling continued resilience in the labor market.

The August Philadelphia Fed manufacturing index climbed 6.0 points to reach a five-year high of 47.4, surpassing projections of a decline to 24.8.

U.S. July leading indicators rose 0.2% month-over-month, outpacing the anticipated increase of 0.1%.

San Francisco Fed President Mary Daly stated that current monetary policy appears well-positioned based on Treasury market signals, adding that she sees no compelling reason for preemptive interest rate hikes at this time.

Market participants are assigning a 35% probability to a 25-basis-point rate hike by the Fed ahead of its September 15-16 policy meeting.

EUR/USD (^EURUSD) declined from a recent three-month peak, falling 0.04% today as the resurgent dollar weighed on the euro. A rally in oil prices to a one-month high also pressured the shared currency, given Europe’s heavy reliance on imported energy.

Nonetheless, the euro found some support following better-than-expected German July producer price data, which hinted at hawkish implications for ECB policy. Rising European bond yields further improved yield differentials in favor of the euro, with the 10-year German Bund yield climbing to a 15-year high of 3.276% today.

Investors now reflect a 95% likelihood of a 25-basis-point rate hike by the European Central Bank at its upcoming policy meeting scheduled for September 10.

USD/JPY (^USDJPY) advanced 0.44%, pressured by increasing crude oil prices and rising U.S. Treasury yields. With over 90% of Japan’s energy needs met through imports, higher energy costs continue to challenge the yen.

Japan’s trade performance painted a brighter picture, however, as exports surged 23.2% year-over-year in July—exceeding expectations of 20.1% and marking the largest gain in over three years. Imports also rose 27.8% annually, surpassing forecasts of 25.1% and reaching their fastest pace in nearly 3.5 years.

Lingering support for the yen stems from growing expectations of a Bank of Japan policy adjustment, particularly after reports that Prime Minister Sanae Takaichi’s administration favors a rate hike in September or October. Such moves would help counter inflation risks linked to a weakening yen. Moreover, recent coordinated intervention efforts between the U.S. and Japan, along with concerns over additional measures if the yen stays depressed, provide further downside protection for the currency.

Markets currently imply a 78% chance of a 25-basis-point rate hike by the BOJ at its upcoming monetary policy review on September 18. Despite this, the yen remains constrained by persistent interest rate differentials, with Japan’s policy rate fixed at just 1.00% compared to the Fed’s target range of 3.50%-3.75%.

October COMEX gold (GCV26) traded down 0.18%, or $8.20, while September COMEX silver (SIU26) gained 1.57%, or 2.39%, climbing to a two-month high.

Precious metals showed mixed performance today, buoyed by prior-day momentum from expanded U.S. Treasury bond buybacks that elevated demand for safe-haven assets. Dovish signals from Fed officials, particularly Mary Daly’s cautious stance on rate hikes, provided additional upside for the sector.

Gold retreated from earlier highs after the dollar index regained strength, compounding pressure alongside a sharp jump in oil prices to a one-month high. Rising commodity values reignited inflation concerns, weighing heavily on non-yield-bearing assets like precious metals.

Fund outflows continue to weigh on precious metal markets, with gold ETF holdings declining to a near 10-month low on July 27, down significantly since peaking at a 3.5-year high earlier in February. Silver ETF positions followed suit, hitting a one-year trough on July 14 after previously setting a multi-year record in late December.

Central bank demand continues to underpin gold prices, highlighted by China’s latest reserve update showing a 640,000-ounce increase in official gold holdings to 76.08 million troy ounces in July—an uninterrupted streak of accumulation lasting twenty-one months.

On the date of publication,
Rich Asplund
did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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