Dollar Slips on Lower T-note Yields and Strength in Stocks

The dollar index (DXY00) fell by -0.32% on Tuesday, falling back from Monday’s 1.5-year high.  The widening of the US Aug trade deficit to a 17-month high was bearish for the dollar. Also, lower T-note yields on Tuesday weighed on the dollar.  In addition, Tuesday’s rally in the S&P 500 and Nasdaq 100 to new all-time highs reduced demand for dollar liquidity.

Hawkish comments on Tuesday from San Francisco Fed President Mary Daly supported the dollar when she said she's concerned that AI spending, tariffs, and energy costs could keep inflation elevated longer, requiring more Fed tightening.

The US Aug trade deficit increased to a 17-month high of -$105.6 billion, wider than expectations of -$102.1 billion and likely to weigh on Q3 GDP.

Markets are pricing in a 19% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) rose by +0.34% on Tuesday, rebounding from Monday’s 16-month low.  Dollar weakness on Tuesday spurred short covering in the euro.  Also, easing political concerns in France supported the euro after French Finance Minister Lescure said France is far from needing help from the ECB to handle its debt crisis.

Gains in the euro were contained on Tuesday after Eurozone Aug retail sales rose less than expected and German Aug factory orders fell more than expected by the most in seven months.

Eurozone Aug retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.

German Aug factory orders fell -10.6% m/m, weaker than expectations of -1.0% m/m and the biggest decline in 7 months.

French Finance Minister Lescure said circumstances in France are very different from a decade earlier during the debt crisis and the country is far from needing help from the ECB.

The markets are discounting a 14% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.16% on Tuesday.  The yen fell on Tuesday as safe-haven demand eased after the Nikkei Stock Index rallied to a 3-month high.  Also weighing on the yen was a Reuters report on Tuesday that said many within the BOJ would prefer to hold interest rates steady at this month’s policy meeting. 

Yen losses were limited Tuesday by hawkish comments from BOJ Governor Ueda, who said the BOJ intends to keep raising interest rates.  Also, Tuesday’s increase in the 10-year JGB government bond yield to a 30-year high of 3.137% strengthened the yen’s interest rate differential.

BOJ Governor Kazuo Ueda said, "We intend to continue raising the policy interest rate and adjusting the degree of monetary accommodation in response to developments in economic activity, prices, and financial conditions." 

Reuters reported Tuesday that many BOJ policymakers are cautious about another interest rate hike in October and prefer to assess more data on the impact of past rate increases.

Markets are pricing in an 11% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up +30.30 (+0.73%) on Tuesday, and December COMEX silver (SIZ26) closed up +0.289 (+0.47%).

Precious metals recovered from early losses on Tuesday and settled higher, sparked by weakness in the dollar. Precious metals also found support as a store of value on Tuesday after Reuters reported that some BOJ members favored not raising interest rates at this month’s policy meeting.

Tuesday’s stock market strength limited gains in precious metals prices, as it reduced safe-haven demand for the metals.  Also, hawkish comments from San Francisco Fed President Mary Daly weighed on precious metals when she said inflation could last longer than expected and require additional Fed tightening.  Demand for precious metals as a safe haven also fell on Tuesday as French debt concerns receded after French Finance Minister Lescure said France is far from needing help from the ECB for its debt crisis.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Tuesday.  Long holdings in silver ETFs rose to a 6.25-month high last Tuesday.

Strong central bank demand for gold is supporting gold prices, after the latest news showed that bullion held in China's PBOC reserves rose by 650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC boosted its gold reserves.

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. For more information please view the Barchart Disclosure Policy here.