The dollar index (DXY00) advanced 0.27% on Tuesday. Soaring Treasury note yields strengthened the dollar’s interest rate differentials and pushed the currency higher. Additionally, WTI crude oil surged 5% to a six-week high, raising inflation expectations and potentially prompting the Federal Reserve to raise interest rates—a supportive factor for the dollar. Tuesday’s equity slump also boosted liquidity demand for the greenback.
Dollar gains were tempered by weaker-than-expected US economic data, including August ISM manufacturing, July construction spending, and July JOLTS job openings.
The US August ISM manufacturing index fell 1.0 points to 54.6, missing expectations of 55.2. The August ISM prices paid sub-index remained unchanged at 71.1, beating forecasts of a decline to 70.8.
US July construction spending decreased 0.5% month-over-month, falling short of expectations for no change.
US July JOLTS job openings unexpectedly increased by 89,000 to 7.271 million from a downward-revised 7.182 million in June, below expectations of 7.313 million.
Hawkish remarks from Federal Reserve Governor Michael Barr provided dollar support, stating, “If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise interest rates.”
Markets are pricing in a 69% probability of a 25 basis point rate hike at the next FOMC meeting on September 15-16.
EUR/USD fell 0.24% on Tuesday. The euro faced pressure from a stronger dollar. Eurozone economic data also weighed on the currency, with a downward revision to the August S&P manufacturing PMI and an unexpected decline in German July retail sales—the largest in five years.
Euro losses were limited as the 5% crude oil rally to a six-week high boosted inflation expectations, potentially prompting the ECB to tighten monetary policy. August Eurozone CPI, which rose at the fastest pace in nearly three years, supports a hawkish ECB stance. Hawkish comments from ECB Governing Council member Martin Kocher also supported the euro, suggesting a rate hike may be necessary if the inflation outlook deteriorates. The 10-year German Bund yield rising to a 15-year high of 3.364% strengthened the euro’s interest rate differentials.
Eurozone August CPI increased 3.3% year-over-year, meeting expectations and marking the fastest pace in nearly three years. August core CPI rose 2.4% year-over-year, slightly below expectations of 2.5%.
The Eurozone July unemployment rate held steady at 6.4%, slightly weaker than expectations of 6.3%.
The Eurozone August S&P manufacturing PMI was revised downward by 0.1 points to 52.7 from the previously reported 52.8.
German July retail sales unexpectedly fell 3.4% month-over-month, missing expectations of a 0.5% increase and marking the biggest decline in five years.
The UK August S&P manufacturing PMI was revised upward by 0.3 points to 51.7 from the previously reported 51.5.
ECB Governing Council member Martin Kocher commented, “Upside risks to inflation have increased again recently. If this picture is confirmed in the ECB’s new forecast, I believe another interest rate hike will be necessary in the near future.”
Markets are pricing in a 99% chance of a 25 basis point ECB rate hike at its next policy meeting on September 10.
USD/JPY advanced 0.28% on Tuesday. The yen tumbled to a one-month low against the dollar. Soaring Treasury note yields weighed on the yen. The 5% surge in crude oil prices to a six-week high is negative for the Japanese economy and yen, as Japan imports more than 90% of its energy.
Yen losses were limited after Japanese economic data showed the August consumer confidence index rose more than expected to a six-month high, and Q2 capital spending increased more than anticipated.
The yen continues to suffer from weak interest rate differentials, with the Bank of Japan’s current policy rate at 1.00%, well below the Federal Reserve’s federal funds rate target range of 3.50%-3.75%.
The yen has underlying support from increased expectations of a BOJ rate hike in September or October. The government favors a rate hike to support the yen and prevent inflationary pressures from a weak currency. The yen also has ongoing support from recent coordinated US-Japan intervention and concerns about further intervention if the yen remains weak. Markets are pricing in a 94% chance of a 25 basis point BOJ rate hike at the September 18 policy meeting.
The Japan August consumer confidence index rose 0.6 points to a six-month high of 35.5, exceeding expectations of 35.3.
Japan Q2 capital spending unexpectedly rose 1.6% year-over-year, beating expectations of a 0.3% decline. Q2 capital spending excluding software increased 3.6% year-over-year, above expectations of 1.6%.
The Japan August S&P manufacturing PMI was revised downward by 0.2 points to 54.9 from the previously reported 55.1.
December COMEX gold closed down $85.10 (1.90%) on Tuesday, and December COMEX silver closed down $1.621 (2.42%).
Precious metals sold off sharply on Tuesday for a third consecutive session, with gold falling to a two-week low and silver falling to a one-and-a-half-week low. The stronger dollar undercut metal prices. The surge in global bond yields is bearish for precious metals. The 5% rally in crude oil prices to a six-week high boosted inflation expectations and could persuade central banks to raise interest rates—a negative factor for precious metals. Additionally, precious metals face headwinds from negative carryover from last Friday when hawkish comments from Fed Chair Warsh raised the probability of a Fed rate hike at next month’s FOMC meeting to 69% on Tuesday from 36% prior to his remarks.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-month high last Friday. Long holdings in silver ETFs also rose to a five-month high last Tuesday.
Strong central bank demand for gold supports prices, following the August 7 news that bullion held in China’s PBOC reserves increased by 640,000 ounces to 76.08 million troy ounces in July—the twenty-first consecutive month the PBOC boosted its gold reserves.
