Dollar Erases Early Gains on Weak US Economic News

The dollar index (DXY00) fell from a 7-week high on Friday and finished down by -0.03%.  The dollar gave its advance on Friday on weaker-than-expected US economic news that showed Aug manufacturing production and Aug leading indicators unexpectedly declined. Also, Friday’s -1% fall in WTI crude oil eased inflation expectations and could persuade the Fed to loosen monetary policy, a bearish factor for the dollar. 

The dollar initially moved higher on Friday on weakness in the yen, which fell to a 2-week low today. Higher T-note yields on Friday also supported the dollar.  The dollar also has carryover support from Wednesday when the FOMC raised interest rates by 25 bp and signaled another rate hike by the end of the year.  The dollar fell from its best level after US 

US Aug manufacturing production unexpectedly fell -0.3% m/m, weaker than expectations of +0.3% m/m and the largest decline in 10 months.

US Aug leading indicators unexpectedly fell -0,1%, weaker than expectations of a +0.1% increase and the first decline in 5 months.

Markets are pricing in a 55% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) recovered from a 7-week low on Friday and finished up by +0.10%.  Short covering emerged in the euro on Friday after the dollar index fell from a 7-week high and turned lower.  The euro also garnered support after German Aug producer prices rose more than expected, a hawkish factor for ECB policy.  Also, ECB President Lagarde's comments today supported the euro when she said economic growth in the Eurozone is a bit more promising than we thought.  

The ECB Aug 1-year CPI expectations rose to +3.0% from +2.9% in July, weaker than expectations of +3.1%. The Aug 3-year CPI expectations rose to +2.9% from +2.7% in July, stronger than expectations of +2.8%.

German Aug PPI rose +1.1% m/m and +4.6% y/y, stronger than expectations of +0.6% m/m and +3.9% y/y, with the +4.6% y/y increase the largest in 3.25 years.

ECB President Christine Lagarde said economic growth in the Eurozone is a bit more promising than we thought, and we're not seeing second-round effects on inflation yet. 

The markets are discounting a 62% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.41% on Friday.  The yen tumbled to a 2-week low against the dollar on Friday, despite the BOJ raising interest rates by 25 bp, as two BOJ members dissented and wanted no change in interest rates, signaling opposition to tighter BOJ policy.  Also, Friday’s weaker-than-expected Japan Aug national CPI report was dovish for BOJ policy and undercut the yen.  In addition, higher T-note yields on Friday also weighed on the yen.  The yen recovered from its worst level on Friday after crude oil prices fell more than -1%, a positive factor for Japan’s economy and the yen, as Japan imports more than 90% of its energy.

Japan’s Aug national CPI rose +1.9% y/y, unchanged from July and weaker than expectations of +2.0% y/y. Aug national CPI ex-fresh food and energy rose +1.9% y/y, unchanged from July and weaker than expectations of +2.0% y/y.

As expected, the BOJ raised its overnight call rate today by 25 bp to 1.25% from 1.00% in a 7-2 vote, and BOJ Governor Kazuo Ueda said the BOJ intends to keep raising the rate in response to economic and price conditions.

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 up +25.20 (+0.57%) on Friday, and December COMEX silver (SIZ26) closed up +1.054 (+1.59%).

Precious metals prices erased early losses on Friday and settled higher.  Gold and silver climbed to 1-week highs on Friday as short covering emerged in precious metals after the dollar index fell from a 7-week high and turned lower.  Also, Friday’s -1% fall in crude oil prices eased inflation expectations and could prompt the world’s central banks to ease their monetary policies, a bullish factor for precious metals.  Silver prices also found support last Friday on signs of stronger industrial metals demand in Europe after ECB President Christine Lagarde said economic growth in the Eurozone is a bit more promising than we thought.   

Gold prices initially moved lower on Friday after the dollar index rallied to a 7-week high.  Higher global bond yields on Friday were also bearish for precious metals.  In addition, Friday’s BOJ rate hike of 25 bp is negative for precious metals. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.5-month high on Friday.  Long holdings in silver ETFs rose to a 5.5-month high on August 25.

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.