Soaring T-note Yields Support the Dollar

The dollar index (DXY00) rose by +0.24% on Monday.  The dollar moved higher on Monday as T-note yields soared, with the 10-year T-note yield jumping to a 19-year high of 5.27%, strengthening the dollar’s interest rate differentials.  Also, Monday’s stock market weakness boosted demand for dollar liquidity.  In addition, hawkish comments from Fed Governor Cook were dollar-supportive when she said the US labor market seems well positioned to handle higher interest rates.

The US Sep Dallas Fed manufacturing survey fell -1.8 to 9.8, a smaller decline than expectations of 7.8.

Fed Governor Lisa Cook said the recent Fed rate hike was meant to address too-high inflation and that the US labor market seems well positioned to handle higher interest rates.

Markets are pricing in a 70% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) fell by -0.21% on Monday.  Dollar strength on Monday weighed on the euro.  Also, dovish comments from ECB President Christine Lagarde undercut the euro when she said higher European bond yields will curb economic expansion and limit the transfer of elevated energy costs to inflation in the Eurozone.  Euro losses were limited on Monday after the 10-year German Bund yield climbed to a 17-year high of 3.65%, strengthening the euro’s interest rate differentials.

Comments today from ECB President Christine Lagarde were dovish for ECB policy and negative for the euro when she said, “While growth has been resilient, since the last ECB meeting, long-term interest rates have risen notably, which will slow growth and reduce pass-through by more than projected in our September exercise.”

The markets are discounting a 36% 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 Monday.  The yen fell from a 1-week high against the dollar on Monday and posted modest losses.  The yen came under pressure on Monday from higher T-note yields after the 10-year T-note yield soared to a 19-year high of 5.27%.  Also, Monday’s early surge in crude prices undercut the yen.

The yen initially moved higher on Monday as comments from Japan’s top currency official fueled speculation that further yen weakness could spark coordinated intervention in the forex market by the US and Japan to support the yen.  Also, Monday’s report showing that Japan’s Aug producer service prices rose at the fastest pace in more than two years is hawkish for BOJ policy and supportive of the yen.

The yen found support Monday after Reuters reported that Japan's top currency official, Atsushi Mimura, said that Japan's prime minister and finance minister, along with the US, have recently sent a "very clear" message about the yen's depreciation. His comments have bolstered speculation that Japanese authorities may be preparing another joint intervention with the US to support the yen.

Markets are pricing in a 39% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed down -152.80 (-3.54%) on Monday, and December COMEX silver (SIZ26) closed down -3.083 (-4.76%).

Precious metals prices plunged on Monday, with gold and silver posting 1.75-month lows. Monday’s dollar strength weighed on metals prices.  Higher global bond yields on Monday also undercut precious metals prices. Hawkish comments from Fed Governor Cook on Monday were bearish for precious metals as she signaled the Fed may keep raising interest rates when she said the US labor market seems well positioned to handle higher interest rates.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.75-month high on Monday.  Long holdings in silver ETFs rose to a 6-month high last 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.