Dollar Slips Before the Treasury’s Buyback Operation

The dollar index (DXY00) dropped to a 2.5-week low today and is down by -0.15%.  The dollar is under pressure today ahead of an announcement from the US Treasury on the size of Thursday’s buyback of long-term US Treasuries, a bearish factor for the dollar.  Also, strength in the yen today is weighing on the dollar after US Treasury Secretary Bessent challenged traders to test his resolve on strengthening the yen.

Limiting losses in the dollar is today’s +2% jump in WTI crude oil to a 3.25-month high, which is boosting inflation expectations and could persuade the Fed to tighten monetary policy.  Also, today’s increase in the 10-year T-note yield to a 2.75-year high of 4.82% has strengthened the dollar’s interest rate differentials. 

The markets are discounting a 64% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) rose to a1.5-week high today and is up by +0.20%.  The euro is climbing today amid dollar weakness.  The euro also has support from expectations that the ECB will raise interest rates by 25 bp at Thursday’s policy meeting.  However, gains in the euro are limited by today’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.

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) is down by -0.49% today.  The yen is moving higher today and is just below Tuesday’s 6.5-month high against the dollar.   Comments from US Treasury Secretary Bessent are boosting 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.

Gains in the yen are limited today 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. Also, today’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 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) is up +22.80 (+0.51%) today, and December COMEX silver (SIZ26) is up +1.405 (+2.10%).

Precious metals are moving higher today, with silver climbing to a 1.5-week high.  Today’s weaker dollar is bullish for precious metal prices, after the dollar index fell to a 2.5-week low.  Precious metals also have support as a store of value on concerns about dollar debasement ahead of Thursday’s operation by the US Treasury to buy back long-term US Treasuries.

Higher global bond yields are negative for precious metals, as the 10-year German Bund yield climbed to a 15-year high today and the 10-year T-note rose to a 2.75-year high.  Also, today’s rally in crude oil prices to a 3.25-month high is boosting 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.