Dollar Strengthens as T-Note Yields Soar

The dollar index (DXY00) rallied to a 1.75-month high on Wednesday and finished up by +0.53%.  The dollar moved higher on Wednesday after the 10-year T-note yield soared to a 19-year high of 5.13%, which strengthened the dollar’s interest rate differentials. The dollar also found support after OECD raised its 2026 US GDP forecast and lowered its US inflation forecast. The dollar strengthened further on speculation that the Fed may keep tightening monetary policy after Fed Governor Michael Barr said, "further policy adjustments by the Fed are likely to be needed to ensure inflation comes down to target in a timely fashion." The dollar raced to its high on Wednesday on signs of US economic strength after the Sep S&P manufacturing PMI unexpectedly expanded at the fastest pace in 4.25 years.

US MBA mortgage applications fell -1.5% in the week ended September 18, with the purchase mortgage sub-index down -0.8% and the refinancing mortgage sub-index down -2.6%. The average 30-year fixed-rate mortgage rose +15 bp to a 2.25-year high of 7.12% from 6.97% in the prior week. 

The US Sep S&P manufacturing PMI unexpectedly rose +3.1 to 57.0, stronger than expectations of a decline to 53.7 and the fastest pace of expansion in 4.25 years.

The OECD raised its 2026 US GDP forecast by +0.2 to 2.2% from a June forecast of 2.0%.  The OECD cut its 2026 US inflation forecast by -0.1 to 3.6% from a June forecast of 3.7%.

Markets are pricing in a 69% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) tumbled to a 1.75-month low on Wednesday and finished down by -0.53%.  Dollar strength weighed on the euro on Wednesday.  The euro found limited support after the Eurozone Sep S&P manufacturing PMI and composite PMI rose more than expected.  Also, hawkish comments on Wednesday from ECB Governing Council member and Bundesbank President Joachim Nagel supported the euro when he said the ECB may have to raise interest rates further amid persistently high inflation. In addition, the action by the OECD on Wednesday to raise its 2026 Eurozone GDP and inflation forecasts was bullish for the euro. 

The Eurozone Sep S&P manufacturing PMI was unchanged at 52.7, stronger than expectations of a decline to 52.6.

The Eurozone Sep S&P composite PMI unexpectedly rose +1.1 to 53.1, stronger than expectations of a decline to 51.7 and the fastest pace of expansion in 3.25 years.

ECB Governing Council member and Bundesbank President Joachim Nagel said Eurozone inflation is above 3% and is projected to stay above the ECB's 2% goal for another year. Therefore, the ECB may have to raise interest rates to a level at which they hold back economic growth.

The OECD raised its 2026 Eurozone GDP forecast by +0.2 to 1.0% from a June forecast of 0.8%.  The OECD also raised its 2026 Eurozone inflation forecast by +0.2 to 3.0% from a June forecast of 2.8%.

The markets are discounting a 60% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.55% on Wednesday.  The yen tumbled to a 2.5-week low against the dollar on Wednesday as the dollar strengthened.  Higher T-note yields also weighed on the yen as the 10-year T-note yield soared to a 19-year high.  The yen found limited support Wednesday after the OECD raised its 2026 Japan GDP forecast. Moves in the yen were exaggerated on Wednesday amid below-normal trading activity, with markets in Japan closed for the Autumnal Equinox Day holiday.

The OECD raised its 2026 Japan GDP forecast to 0.8% from 0.6% in June.

Markets are pricing in an 18% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed down -58.00 (-1.33%) on Wednesday, and December COMEX silver (SIZ26) closed down -1.566 (-2.35%).

Precious metals prices fell sharply on Wednesday, pressured by a rally in the dollar index to a 1.75-month high.  Hawkish central bank comments also weighed on precious metals Wednesday after ECB Governing Council member Joachim Nagel said the ECB may have to keep raising interest rates amid persistently high inflation, and Fed Governor Michael Barr said additional Fed rate hikes are likely to be needed to contain inflation.

Silver prices garnered some support on Wednesday on signs of stronger global industrial metals demand after the OECD raised its 2026 GDP forecasts for the US, the Eurozone, and Japan. Also, Wednesday’s unexpected increase in the US Sep S&P manufacturing PMI to a 4.25-year high signals stronger industrial metals demand.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.5-month high on Monday.  Long holdings in silver ETFs rose to a 5.75-month high on Tuesday.

Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second 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.