Dollar Retreats and Gold Surges on Dovish Fed Waller

The dollar index (DXY00) fell to a 1.5-week low on Thursday and finished down by -0.67%.  The dollar tumbled on Thursday on dovish comments from Fed Governor Christopher Waller, who said underlying inflation is better than core numbers suggest and that he will support keeping interest rates steady at this month’s FOMC meeting if next week’s inflation news shows “continued progress toward our 2% goal.”  Mr. Waller’s comments reduced the chance of a Fed rate hike at this month’s FOMC meeting to 52% from 65% before he spoke. A stronger yen also weighed on the dollar as it rallied to a 1-month high on Thursday.  The dollar found some support Thursday after the Aug ISM services index unexpectedly rose to a 6-month high.

US weekly initial unemployment claims rose +2,000 to 206,000, close to expectations of 205,000, showing a stable labor market.

US Q2 nonfarm productivity was left unrevised at +1.4%, but Q2 unit labor costs were revised lower to +1.2% from the previously reported +1.3%.

The US Aug ISM services index unexpectedly rose +1.3 to a 6-month high of 55.4, stronger than expectations of no change at 54.1.  The Aug ISM price paid sub-index unexpectedly rose +2.3 to a 4-year high of 72.6, stronger than expectations of a decline to 70.0. 

Fed Governor Christopher Waller said underlying inflation is better than core numbers suggest and his decision on interest rates at this month's FOMC meeting will be "heavily influenced" by August inflation data due next week. He added, "If there is continued progress toward our 2% goal, I am willing to support holding the policy rate at its current level.  However, if inflation comes in hot, I would consider a rate hike."

The markets are discounting a 52% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) rose by +0.38% on Thursday.  The euro moved higher on Thursday after dovish comments from Fed Governor Waller knocked the dollar down to a 1.5-week low.  The euro also found support from Thursday’s economic news that showed Eurozone July producer prices rose more than expected, a hawkish factor for ECB policy.   Gains in the euro were limited after crude oil prices jumped to a 6-week high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy. 

Eurozone July PPI rose +1.6% m/m and +5.8% y/y, stronger than expectations of +1.3% m/m and +5.5% y/y.

The Eurozone Aug S&P composite PMI was revised downward by -0.1 to 53.0 from the previously reported 52.1. 

The markets are discounting a 100% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) fell by -1.97% on Thursday.  The yen rallied sharply to a 1-month high against the dollar on Thursday.  Concerns that Japan could intervene in currency markets again to support the yen sparked short covering in the yen on Thursday when Japan’s top currency official, Atsushi Mimura, said he was unsatisfied with the yen’s current situation and pledged “to continue the battle on forex.”  Yen gains accelerated Thursday amid speculation that Japan’s Government Pension Investment Fund could boost its allocation of Japanese government bonds, which is bullish for the yen.  In addition, lower T-note yields on Thursday supported the yen. 

The yen has underlying support from increased expectations of a BOJ rate hike later this month.  The markets are discounting a 98% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.  The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen.  Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. 

The yen also continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00%, well below the Fed's federal funds rate target range of 3.50%-3.75%.

Japan's Aug S&P services PMI was revised up by +0.2 to 52.5 from the previously reported 52.3.

The yen jumped on Thursday after Japan's Government Pension Investment Fund, which manages $2 trillion in investments, held an unusual meeting, fueling speculation that the fund may boost its allocation to Japanese government bonds after yields rose to a 30-year high.  If the fund goes ahead with an asset allocation, it will boost its demand for yen to make purchases. 

December COMEX gold (GCZ26) closed up +125.30 (+2.84%) on Thursday, and December COMEX silver (SIZ26) closed up +2.241 (+3.42%).

Precious metals settled sharply higher on Thursday after the dollar index dropped to a 1.5-week low. Also, dovish comments on Thursday from Fed Governor Christopher Waller boosted precious metals when he said underlying inflation is better than core numbers suggest and he will support keeping interest rates steady at this month’s FOMC meeting if next week’s inflation news shows “continued progress toward our 2% goal.”  Mr. Waller’s comments reduced the chance of a Fed rate hike at this month’s FOMC meeting to 52% from 65% before he spoke. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 5.5-month high on Thursday.  Long holdings in silver ETFs also rose to a 5-month high last Tuesday.

Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China's PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first 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.