Dollar Moves Lower With T-Note Yields

The dollar index (DXY00) fell by -0.12% on Thursday.  The dollar gave up an early advance on Thursday and turned lower after T-note yields fell, narrowing the dollar’s interest rate differentials.  A stronger euro also weighed on the dollar after the German Economy Ministry raised its 2026 German GDP forecast. 

The dollar initially moved higher Thursday after WTI crude oil rallied more than +3%, which raised inflation expectations and is hawkish for Fed policy and supportive of the dollar. Also, hawkish comments from Fed Governor Christopher Waller and St. Louis Fed President Alberto Musalem were bullish for the dollar, as they said they expect additional Fed rate hikes to tame inflation.  In addition, Thursday’s unexpected decline in weekly US jobless claims to a 2.5-month low shows labor market strength that is bullish for the dollar.

US weekly initial unemployment claims unexpectedly fell by -2,000 to a 2.5-month low of 197,000, showing a stronger labor market than expectations of an increase to 200,000.

Fed Governor Christopher Waller said, "If the economic data continue to come in as expected, I anticipate additional rate hikes to support a timelier return of inflation to our 2% goal."

St. Louis Fed President Alberto Musalem signaled additional Fed interest rate hikes ahead when he said, "To bring inflation back to target in a timely manner, more monetary policy firming will be required."

Crude prices soared Thursday, supporting the dollar, on signs of a possible escalation of the US-Iran conflict after an Atlantic report said the White House asked the Pentagon to draw up strike options against Iran that could be executed before the midterm elections. 

Markets are pricing in a 17% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) rose by +0.13% on Thursday.  The euro erased overnight losses and moved higher on Thursday after the German Economy Ministry raised its 2026 German GDP forecast. The euro also found support from the ECB’s summary of last month’s policy meeting, which showed that policymakers warned that further rate hikes may be necessary to contain inflation.

The euro initially moved lower on Thursday on weaker-than-expected German trade news for August.  Also, Thursday’s +3% surge in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of it energy.

The summary of the September 9-10 ECB meeting showed officials warned that further action on inflation is needed, while also assessing that any interest rate increase would still not curb growth.

German trade news was weaker than expected after German Aug exports unexpectedly fell -0.8% m/m, weaker than expectations of+0.9% m/m and the biggest decline in 9 months.  Aug imports rose +0.9% m/M, weaker than expectations of +2.8% m/m.

The German Economy Ministry raised its 2026 German GDP forecast to 1.3% from a previous estimate of 0.5%.

The markets are discounting a 12% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell by -0.16% on Thursday.  The yen recovered from early losses on Thursday after T-note yields gave up an early advance and turned lower, sparking short covering in the yen.  The yen also found support from the BOJ’s quarterly economic report, which upgraded its assessment of Japan's regional economy for the first time since early last year, signaling growing confidence in the recovery and supporting the case for another interest rate hike.  The BOJ kept the assessment of 7 of 9 regions unchanged and upgraded 2 regions.

The yen initially moved lower on Thursday after Japan’s Sep eco watchers outlook survey unexpectedly declined.  Also, Thursday’s +3% surge in crude oil prices is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  

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 +16.30 (+0.39%) on Thursday, and December COMEX silver (SIZ26) closed down -0.870 (-1.44%).

Precious metals prices settled mixed on Thursday, with silver falling to a 2-month low.  Thursday’s +3% jump in crude oil prices raises inflation expectations and could persuade global central banks to tighten monetary policy, which is bearish for precious metals. Also, hawkish Fed comments on Thursday from Fed Governor Christopher Waller and St. Louis Fed President Alberto Musalem weighed on precious metals, as they said they expect additional Fed rate hikes to tame inflation.

Precious metals found support today after the dollar erased early gains and turned lower as solid demand for the Treasury’s $22 billion auction of 30-year T-bonds knocked bond yields lower.  Gold prices also found support Thursday on signs of strong demand from China’s central bank after the PBOC added 740,000 ounces of gold to its reserves last month, the most in three years.  Silver found some support Thursday after the German Economy Ministry raised its 2026 German GDP forecast, signaling stronger demand for industrial metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Thursday.  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 Thursday’s news showed that bullion held in China's PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third 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.