Dollar Retreats as Crude Prices Fall and Stocks Rally

The dollar index (DXY00) is down by -0.24% today, falling back from Monday’s 1.5-year high.  The widening of the US Aug trade deficit to a 17-month high is bearish for the dollar. Also, today’s -1% decline in WTI crude oil to a 1-month low eases inflation expectations and could potentially persuade the Fed to loosen monetary policy, a negative factor for the dollar.   In addition, today’s rally in the S&P 500 and Nasdaq 100 to new all-time highs has reduced demand for dollar liquidity.

The US Aug trade deficit increased to a 17-month high of -$105.6 billion, wider than expectations of -$102.1 billion and likely to weigh on Q3 GDP.

Markets are pricing in a 22% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) is up by +0.23% today, rebounding from Monday’s 16-month low.  Dollar weakness today has spurred short covering in the euro.  Also, easing political concerns in France are supportive of the euro after French Finance Minister Lescure said France is far from needing help from the ECB to handle its debt crisis.  In addition, today’s -1% fall in crude oil prices supports the Eurozone economy and the euro, as Europe imports most of its energy. 

Gains in the euro are contained today after Eurozone Aug retail sales rose less than expected and German Aug factory orders fell more than expected by the most in seven months.

Eurozone Aug retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.

German Aug factory orders fell -10.6% m/m, weaker than expectations of -1.0% m/m and the biggest decline in 7 months.

French Finance Minister Lescure said circumstances in France are very different from a decade earlier during the debt crisis and the country is far from needing help from the ECB.

The markets are discounting a 14% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) is up by +0.15% today.  The yen is sliding today on reduced safe-haven demand after the Nikkei Stock Index rallied to a 3-month high.  Also weighing on the yen is a Reuters report today saying many within the BOJ would prefer to hold interest rates steady at this month’s policy meeting. 

Yen losses are limited today by hawkish comments from BOJ Governor Ueda, who said the BOJ intends to keep raising interest rates.  Also, today’s -1% decline in crude oil prices to a 1-month low supports Japan’s economy and the yen, as Japan imports more than 90% of its energy.  In addition, today’s increase in the 10-year JGB government bond yield to a 30-year high of 3.137% strengthened the yen’s interest rate differential.

BOJ Governor Kazuo Ueda said, "We intend to continue raising the policy interest rate and adjusting the degree of monetary accommodation in response to developments in economic activity, prices, and financial conditions." 

Reuters reported today that many policymakers within the BOJ are cautious about another interest rate hike in October and prefer to assess more data on the impact of past rate increases.

Markets are pricing in a 12% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) is up +24.60 (+0.59%) today, and December COMEX silver (SIZ26) is up +0.055 (+0.09%).

Precious metals recovered from early losses today and moved higher, sparked by weakness in the dollar. Also, today’s -1% decline in crude oil prices to a 1-month low eases inflation expectations that could prompt the world’s central banks to ease their monetary policies, a bullish factor for precious metals.  In addition, gold prices found support as a store of value after Reuters reported that some BOJ members favored not raising interest rates at this month’s policy meeting.

Today’s stock market strength is limiting gains in precious metals prices, reducing safe-haven demand for the metals.  Demand for precious metals as a safe haven also fell today as French debt concerns receded after French Finance Minister Lescure said France is far from needing help from the ECB for its debt crisis.

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