Dollar Supported by Higher T-Note Yields

The dollar index (DXY00) climbed to a 2-month high on Tuesday, finishing up by +0.19%.  The dollar found support on Tuesday from rising T-note yields as the 10-year T-note yield jumped to a new 19-year high, strengthening the dollar’s interest rate differentials.

Dollar gains were limited Tuesday by weaker-than-expected US economic news on Aug JOLTS job openings and Sep consumer confidence.  Also, Tuesday’s -3% decline in WTI crude oil has eased inflation expectations and is dovish for Fed policy.  In addition, dovish comments from New York Fed President John Williams weighed on the dollar when he said the Fed may need only one more rate hike to contain inflation.

The US July S&P composite-20 home price index rose 0.3% m/m and +2.47% y/y, stronger than expectations of +0.2% m/m and +2.20% y/y, with the +2.47% y/y gain the largest year-on-year increase in 14 months.

US Aug JOLTS job openings fell -256,000 to a 5-month low of 7.079 million, weaker than expectations of 7.228 million.

The Conference Board US Sep consumer confidence index fell -6.7 to a 12-year low of 81.9, weaker than expectations of 89.0.

New York Fed President John Williams said, "If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target."

Markets are pricing in a 52% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) tumbled to a 3-month low on Tuesday and finished down by -0.27%.  Dollar strength is undercutting the euro today.  The euro is also under pressure after the Eurozone Sep economic confidence indicator unexpectedly declined.  In addition, the euro has negative carryover from Monday, when ECB President Christine Lagarde said that higher European bond yields will curb economic expansion and limit the transfer of elevated energy costs to inflation in the Eurozone. 

Euro losses are limited today after Spain’s Sep CPI rose more than expected, a hawkish factor for ECB policy.  Also, today’s -1% decline in crude oil prices supports the Eurozone economy and the euro, as Europe imports most of its energy. 

The Eurozone Sep economic confidence indicator unexpectedly fell -0.5 to 97.9, weaker than expectations of an increase to 99.0.

Spain Sep CPI (EU harmonized) rose +5.0% y/y, stronger than expectations of +4.9% y/y and the largest increase in 3.5 years.  Sep core CPI rose +3.1% y/y, stronger than expectations of +3.0% y/y.

The markets are discounting a 32% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell by -0.11% on Tuesday.  The yen finished higher on Tuesday, supported by the -3% plunge in crude oil prices, which supports Japan’s economy and the yen, as Japan imports more than 90% of its energy.  However, higher T-note yields on Tuesday limited yen gains.

The yen also has carryover support from Monday, when 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.

The Japan July leading index CI was revised downward by -0.2 to 117.7 from the previously reported 117.9.

Japan's Finance Minister Satsuki Katayama said weakness in the yen remains an ongoing concern, and Japan and the US will stay in close contact as they seek to maintain an orderly currency market. 

Markets are pricing in a 31% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up +11.30 (+0.27%) on Tuesday, and December COMEX silver (SIZ26) closed down -0.565 (-0.92%).

Precious metals prices settled mixed on Tuesday, with silver posting a 1.75-month low. Tuesday’s rally in the dollar index to a 2-month high is bearish for metals prices.  Also, Tuesday’s jump in the 10-year T-note yield to a new 19-year high bolsters the outlook for the Fed to keep raising interest rates, a bearish factor for precious metals.  On the positive side for precious metals was Tuesday’s -3% plunge in crude oil prices, which lowers inflation expectations and could prompt the world’s central banks to loosen their monetary policies, a bullish factor for precious metals.  Also, New York Fed President Williams's comments were bullish for precious metals when he said the Fed needs just one more rate hike to contain inflation.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Tuesday.  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.