Dollar Supported by Hawkish Fed Comments

The dollar index (DXY00) climbed to a 7-week high on Tuesday and finished up +0.17%.  The dollar found support today on hawkish Fed comments, after Boston Fed President Susan Collins and Richmond Fed President Tom Barkin warned that inflation pressures could remain elevated, suggesting they may favor additional Fed tightening.

Dollar gains were limited on Tuesday after WTI crude oil prices fell more than 1% to a 3-week low, easing inflation expectations and potentially persuading the Fed to loosen monetary policy, a bearish factor for the dollar.  Also, Tuesday’s weaker-than-expected Sep Richmond Fed manufacturing survey was bearish for the dollar.

The US Sep Richmond Fed manufacturing survey fell -6 to a 7-month low of -2, weaker than expectations of 2.

Boston Fed President Susan Collins said she saw an "increased likelihood" of scenarios in which inflation remains "notably above 2%."

Richmond Fed President Tom Barkin warned it could take time for inflationary shocks to wane, and there is a risk elevated pressures could become entrenched.   

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) fell to a 7-week low on Tuesday and finished down -0.18%.  Dollar strength on Tuesday undercut the euro.  Lower European government bond yields also weighed on the euro after the 10-year German Bund yield fell to a 1.5-week low of 3.422% on Tuesday, weakening the euro’s interest rate differentials.  Euro losses accelerated after the Eurozone Sep consumer confidence index fell more than expected. 

Euro losses were limited Tuesday on concerns that the ECB may have to keep tightening monetary policy after ECB Chief Economist Philip Lane said a new wave of high energy prices means Eurozone inflation will stay elevated longer than the ECB initially anticipated.  Also, Tuesday’s -1% decline in crude oil prices to a 3-week low supports the Eurozone economy and the euro, as Europe imports most of its energy. 

The Eurozone Sep consumer confidence index fell -1.0 to -16.5, weaker than expectations of -16.0.

The markets are discounting a 48% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.08% on Tuesday.  The yen gave up an early advance and turned lower on Tuesday after T-note yields recovered from early losses and moved higher, pressuring the yen.  The yen initially moved higher on Tuesday after crude oil prices fell more than -1% to a 3-week low, which is a positive factor for Japan’s economy and the yen, as Japan imports more than 90% of its energy.  Moves in the yen may have been exaggerated on Tuesday amid below-normal trading activity, with markets in Japan closed for a National holiday.

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 -7.50 (-0.17%) on Tuesday, and December COMEX silver (SIZ26) closed up +0.115 (+0.17%).

Precious metals prices settled mixed on Tuesday.  Metals were pressured on Tuesday by the rally in the dollar index to a 7-week high.  Hawkish central bank comments also undercut precious metals after Boston Fed President Susan Collins and Richmond Fed President Tom Barkin warned that inflation pressures could remain elevated.  Also, ECB Chief Economist Philip Lane said inflation in the Eurozone may stay elevated longer than the ECB initially anticipated, raising concerns the Fed and ECB may tighten monetary policy further.

Precious metals found support on Tuesday after crude oil prices fell more than -1% to a 3-week low, easing inflation expectations and potentially prompting the world’s central banks to ease monetary policy, a bullish factor 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 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.