Dollar Recovers on Smaller Treasury Buyback and Higher T-Note Yields

The dollar index (DXY00) recovered from a 2.5-week low on Wednesday and finished up by +0.06%.  The dollar found support on Wednesday after WTI crude oil surged +3 % to a 3.25-month high, boosting inflation expectations and potentially persuading the Fed to tighten monetary policy.  Also, short covering emerged in the dollar on Wednesday after the US Treasury announced it would purchase $6 billion of long-term US government debt securities on Thursday, below expectations of $10 billion.  In addition, Wednesday’s increase in the 10-year T-note yield to a 2.75-year high of 4.85% has strengthened the dollar’s interest rate differentials. 

The dollar initially moved lower on Wednesday amid strength in the yen after US Treasury Secretary Bessent challenged traders to test his resolve on strengthening the yen.

The markets are discounting a 61% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) rose to a 1.5-week high on Wednesday and finished up by +0.04%.  The euro found support on Wednesday from expectations that the ECB will raise interest rates by 25 bp at Thursday’s policy meeting.  Also, the surge in the 10-year German Bund yield to a 15-year high of 3.444% on Wednesday strengthened the euro’s interest rate differentials.

However, gains in the euro were limited by Wednesday’s rally in crude oil prices to a 3.25-month high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy.  Also, a rebound in the dollar on Wednesday knocked the euro off its high.

French July manufacturing production unexpectedly fell -0.8% m/m, weaker than expectations of a +0.4% m/m increase.

The markets are discounting a 100% chance of a +25 bp ECB rate hike at Thursday’s policy meeting.

USD/JPY (^USDJPY) fell by -0.19% on Wednesday.  The yen moved higher on Wednesday and is just below Tuesday’s 6.5-month high against the dollar.   Comments from US Treasury Secretary Bessent boosted the yen after he dared traders to test his resolve in supporting the yen, suggesting the US could intervene in the forex market with Japan at any time to support the currency.

The yen fell back from its best level on Wednesday after crude oil prices jumped to a 3.25-month high, which is negative for the Japanese economy and yen, as Japan imports more than 90% of its energy.  Higher T-note yields on Wednesday also weighed on the yen.  In addition, Wednesday’s decline in Japan’s JGB 10-year bond yield to a 2.5-week low of 2.867% weakened the yen’s interest rate differentials. 

Japan Aug machine tool orders rose +64.7% y/y, the largest increase in 4.75 years.

Hawkish comments from US Treasury Secretary Bessent on Wednesday signaled the US may intervene in the currency markets again with Japan to support the yen when he challenged traders to test his resolve on boosting the yen, saying, "I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the BOJ is going to do, what Japanese policymakers are going to do."

The yen has carryover support from Tuesday, when the Japanese health minister, who oversees the Government Pension Investment Fund (GPIF) that holds $2.1 trillion in assets, said the fund is still considering whether it needs to review its asset allocation.  The recent jump in the 10-year Japanese JGB government bond yield to a 30-year high has fueled speculation that the GPIF may move to boost its allocation of Japanese government bonds, which would support the yen.

The yen also has underlying support from increased expectations of a BOJ rate hike later this month.  The markets are discounting a 98% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.  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. 

December COMEX gold (GCZ26) closed up +21.70 (+0.49%) on Wednesday, and December COMEX silver (SIZ26) closed up +1.646 (+2.36%).

Precious metals settled higher on Wednesday with silver up sharply at a 1.5-week high.  Wednesday’s decline in the dollar index to a 2.5-week low supported precious metals.  Also, concerns about dollar debasement boosted demand for precious metals as a store of value after the US Treasury announced it will buy back $6 billion of long-term US Treasuries on Thursday.

Higher global bond yields are negative for precious metals, as the 10-year German Bund yield climbed to a 15-year high on Wednesday and the 10-year T-note rose to a 2.75-year high. Also, Wednesday’s rally in crude oil prices to a 3.25-month high boosted inflation expectations and could potentially persuade the world’s central banks to tighten monetary policy, a bearish factor for precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 5.75-month high last Thursday.  Long holdings in silver ETFs also rose to a 5.5-month high on August 25.

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.