Dollar Fades on Weaker US Interest Rate Differentials
The dollar index (DXY00) gave up an early gain and ended the day down -0.18%. The dollar saw some early safe-haven support but faded during the day as US interest rate differentials sagged. The 10-year T-note yield on Thursday plunged by -17 bp, and the 2-year T-note yield fell by -16 bp. Also, the odds of a Fed rate hike at next week’s meeting fell to 7% on Thursday from 15% on Wednesday.
There was early safe-haven support for the dollar on Middle East tensions after there were several attacks in the past two days by the Houthi militia on targets in Saudi Arabia, including an oil field, a port, and an airport in Dammam. The US State Department also said Wednesday afternoon that it was evacuating non-essential personnel and families from Saudi Arabia.
The Saudi evacuation sparked some market speculation that the US might be planning a new wave of attacks on Iran and/or the Houthis after the November 3 election. Indeed, the New York Times reported Thursday that the US and Israeli militaries have developed specific plans for renewed military strikes against Iran after the US and Israeli elections, although the report said President Trump has not yet approved those plans. The goal of a new military attack would be to deliver a knockout punch to Iran that would topple the government or at least force Iranian leaders to capitulate to US demands, although that has so far only been a fever dream of US planners.
Markets are pricing in a 7% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.
EUR/USD (^EURUSD) fell by -0.12% despite the lower dollar. Social unrest in France continues to undercut the euro, likely driving some investor flight from French assets.
The French bond market has recently been in a near-crisis mode, with the 10-year spread over Germany rising to a 15-year high of 175 bp. The French 10-year government bond yield on Thursday rose +6 bp to a 24-year high of 5.07%, up by more than a full percentage point from the 4% level seen just two months ago in August.
Markets are pricing in a 2% chance of a +25 bp ECB rate hike at next week’s ECB policy meeting on October 29.
USD/JPY (^USDJPY) fell -0.82%. The yen rallied on repatriation demand from Japanese investors after a sharp sell-off in the US stock market. The yen found support Tuesday after Reuters reported that the BOJ will raise its inflation forecast for fiscal 2027 at next week’s policy meeting, a hawkish factor for BOJ policy.
Markets are pricing in a 2% chance of a +25 bp BOJ rate hike at next week’s policy meeting on October 30.
December COMEX gold (GCZ26) closed down -89.60 (-2.16%) on Thursday, and December COMEX silver (SIZ26) closed down -2.703 (-4.68%).
Precious metals fell sharply on Thursday due to risk-off sentiment. Some investors were likely dumping precious metals positions to cover margin losses on stocks. Crypto also took a hit Thursday, with Bitcoin falling -3.8%.
Gold traded lower despite bullish factors, including a -17 bp decline in the 10-year T-note yield and lower odds of a Fed rate hike next week.
Gold also traded lower despite safe-haven support from higher tensions in the Middle East, with continued attacks by the Houthis on Saudi targets and the US State Department’s evacuation order yesterday for non-essential personnel and families in Saudi Arabia.
Gold prices were undercut Tuesday when Russia’s central bank reported reducing its gold reserves to 72.8 million ounces as of October 1, the lowest level in 7 years. Russia’s central bank is the sixth largest holder of gold among the world’s central banks.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high on Wednesday before backing off slightly on Thursday. Long holdings in silver ETFs rose to a 7-month high on Wednesday.
Strong central bank demand for gold is supporting gold prices, after recent 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.