Dollar Little Changed as Stocks Rally
The dollar index (DXY00) rose to a 1-week high today and is up +0.01%. The dollar found some support today after weekly US jobless claims unexpectedly declined, a sign of strength in the labor market. Also, hawkish comments today from Kansas City Fed President Jeff Schmid supported the dollar when he said current Fed policy isn’t in restrictive territory. However, the dollar gave up nearly all of its gains as stocks rallied, which curbed liquidity demand for the dollar.
US weekly initial unemployment claims unexpectedly fell -4,000 to 203,000, showing a stronger labor market than expectations of an increase to 208,000.
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Kansas City Fed President Jeff Schmid said current Fed policy is not restraining the economy at a time when inflation continues to run above its 2% target. He added that the interest rate setting "might be accommodative on the short end" and that "we've got work to do."
The markets are discounting a 35% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) fell to a 1-week low today and is down by -0.01%. The dollar’s strength today is weighing on the euro. Also, concerns about an escalation of the Russia-Ukraine war are bearish for the euro after Bloomberg reported that Russia is preparing to escalate attacks on Ukraine after concluding that negotiations for a peace deal have reached a dead end.
Limiting losses in the euro today is the stronger-than-expected increase in the German Sep GfK consumer confidence index to a 6-month high. Also, the euro has positive carryover from Wednesday, when ECB Executive Board member Isabel Schnabel said that, with inflation above the ECB’s 2% target, further ECB tightening will be necessary.
Eurozone July M3 money supply rose +3.4% y/y, weaker than expectations of +3.5% y/y.
The German Sep GfK consumer confidence index rose +2.8 to a 6-month high of -26.6, stronger than expectations of -29.5.
The markets are discounting a 97% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) is up by +0.04% today. The yen fell to a 1-week low against the dollar today on dollar strength and higher T-note yields. The yen also continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00%, well below the Fed's federal funds rate target range of 3.50%-3.75%.
The yen found some support today on comments from BOJ Deputy Governor Ryozo Himino, who said, "We should pay greater attention to the upside risk to prices than in the past. Raising interest rates in a timely manner will help avoid inflation acceleration and abrupt rate hikes in the future and may ultimately be in the best interests of small and midsize businesses, mortgage borrowers, and public finances."
The yen has underlying support from increased expectations of a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. The markets are discounting an 82% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.
October COMEX gold (GCV26) is down -26.50 (-0.57%) on Wednesday, and September COMEX silver (SIU26) is up +0.069 (+0.16%).
Precious metals prices are mixed today. Strength in the dollar is negative for metals prices as the dollar index rallied to a 1-week high. Also, strength in stocks today has reduced safe-haven demand for precious metals. In addition, hawkish comments today from Kansas City Fed President Jeff Schmid undercut precious metals when he said current Fed policy is not restraining the economy at a time when inflation continues to run above its 2% target.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-month high on Wednesday. Long holdings in silver ETFs also rose to a 4.75-month high on Tuesday.
Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China's PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first 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.
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