Euro Weakness and Higher T-Note Yields Boost the Dollar

The dollar index (DXY00) rallied to a 1.5-year high on Monday and finished up by +0.23%.  The dollar moved higher on Monday amid increased safe-haven demand as political turmoil in France and Spain weighed on the euro.  Higher T-note yields on Monday also strengthened the dollar’s interest rate differentials after the 10-year T-note yield rose to a 24-year high of 5.35%. The dollar added to its gains on Monday after the prices paid sub-index of the Sep ISM services index rose more than expected to a 4-year high, a hawkish factor for Fed policy. 

Dollar gains were limited on Monday after WTI crude oil fell more than 1%, easing inflation expectations that could persuade the Fed to ease monetary policy, a negative factor for the dollar. 

The US Sep ISM services index fell -0.5 to 54.9, slightly weaker than expectations of 55.0.  The Sep ISM services prices paid sub-index rose +1.4 to a 4-year high of 74.0, stronger than expectations of 73.3.

Markets are pricing in a 24% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) tumbled to a 16-month low on Monday and finished down by -0.34%.  The euro was under pressure on Monday from political turmoil in Europe and mounting concerns over Europe's public finances.  Policy gridlock in France has undercut the euro, and political turmoil in Spain is rising after Spanish Prime Minister Sanchez called for an early election next month amid mounting social protests over housing costs.  The larger-than-expected decline in the Eurozone Oct Sentix investor confidence index also weighed on the euro.   On the positive side of the euro was Monday’s stronger-than-expected Eurozone Aug PPI report, which is hawkish for ECB policy. 

The Eurozone Oct Sentix investor confidence index fell -2.4 to 2.7, weaker than expectations of 4.2.

Eurozone Aug PPI rose +8.2% y/y, stronger than expectations of +7.6% y/y and the largest increase in 3.5 years.

ECB Chief Economist Philip Lane said a measured ECB response is appropriate to control inflation as policymakers assess how a second wave of the energy shock affects the economy.

The markets are discounting a 13% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.09% on Monday.  The yen was under pressure on Monday amid a stronger dollar.  Also, the downward revision to the Japan Sep S&P PMI services index is weighing on the yen.  In addition, higher T-note yields undercut the yen on Monday after the 10-year T-note yield rose to a new 24-year high.

Yen losses were contained on Monday by the stronger-than-expected Japan Sep consumer confidence index.  Also, crude oil prices fell more than -1%, which supports Japan’s economy and the yen as Japan imports more than 90% of its energy.

The Japan Sep consumer confidence index fell -0.1 to 35.4, stronger than expectations of 35.3.

The Japan Sep S&P PMI services index was revised downward by -0.3 to 51.3, from the previously reported 51.6.

Markets are pricing in an 11% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed down -5.50 (-0.13%) on Monday, and December COMEX silver (SIZ26) closed up +0.885 (+1.56%).

Precious metals settled mixed on Monday.  Political turmoil in Europe boosted safe-haven demand for the metals.  Spanish Prime Minister Sanchez called for an early election next month amid mounting social protests over housing costs and after Spain's Parliament rejected a housing plan.  Falling crude prices on Monday also supported precious metals, as lower crude oil prices reduce inflation expectations and could prompt the world’s central banks to loosen monetary policy, which is bullish for precious metals.  Gold prices also garnered support on Monday after ECB Governing Council member and Bundesbank President Joachim Nagel said rising government debt levels strengthen the case for central banks to increase their gold holdings.

However, gold prices gave up their advance and fell into negative territory on Monday after the dollar index rallied to a 1.5-year high.  Also, signs of global price pressures may prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals, after the US Sep ISM services price paid sub-index rose to a 4-year high and Eurozone Aug PPI rose at the fastest pace in 3.5 years.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high last Friday.  Long holdings in silver ETFs rose to a 6.25-month high last Tuesday.

Strong central bank demand for gold is supporting gold prices, after the latest news showed 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.