Dollar Rises on US Labor Market Strength

The dollar index (DXY00) rose by +0.20% on Friday.  The dollar finished higher on Friday after a stronger-than-expected US Aug payroll report, which boosted the chances that the Fed will raise interest rates this year.  The chance of a Fed rate hike at the Sep 15-16 FOMC meeting rose to 60% from 52% before the report.  Weakness in stocks on Friday also spurred some liquidity demand for the dollar.

US Aug nonfarm payrolls rose +162,000, stronger than expectations of +55,000 and the largest increase in 5 months.  Also, July payrolls were revised upward to show an increase of +21,000, stronger than the previously reported decline of -23,000.  The Aug unemployment rate remained unchanged at 4.1%, in line with expectations.

US Aug average hourly earnings rose +0.3% m/m and +3.1% y/y, right on expectations.

The markets are discounting a 60% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell by -0.12% on Friday.  The euro moved lower after Friday’s economic news showed Eurozone July retail sales unexpectedly fell by the most in two years. The euro remained under pressure on Friday after the dollar rallied on the stronger-than-expected US Aug payroll report.  Euro losses were limited after German July factory orders rose more than expected.

Eurozone July retail sales unexpectedly fell -0.6% m/m, weaker than expectations of +0.2% m/m and the biggest decline in two years.

German July factory orders rose +2.5% m/m, stronger than expectations of +0.3% m/m.

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) rose by +0.28% on Friday.  The yen moved lower after Friday’s Japanese economic news showed July household spending fell more than expected by the most in 2.5 years.  Also, Friday’s slide in Japan’s JGB 10-year bond yield to a 1-week low of 2.898% weakened the yen’s interest rate differentials.  The yen added to its losses on Friday after the dollar rallied on the stronger-than-expected US Aug payroll report.   

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%.

Losses in the yen were limited on Friday on carryover support from 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.” 

The yen also has underlying support from increased expectations of a BOJ rate hike later this month.  The markets are discounting a 97% 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. 

Japan July household spending fell -3.6% y/y, weaker than expectations of -1.6% y/y and the biggest decline in 2.5 years.

December COMEX gold (GCZ26) is down -63.30 (-1.39%) on Friday, and December COMEX silver (SIZ26) closed down -0.956 (-1.41%).

Precious metals settled sharply lower on Friday after the dollar index rallied on the stronger-than-expected US Aug payroll report.  The stronger payroll report also boosted the chances of a Fed rate hike at this month’s FOMC meeting to 60% from 52% before the report, weighing on precious metals. In addition, higher T-note yields on Friday weighed on precious metals. 

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.