The dollar index (DXY00) on Tuesday rose by +0.63%. Tuesday’s weakness in stocks boosted liquidity demand for the dollar. Also, higher T-note yields on Tuesday strengthened the dollar’s interest rate differentials and were supportive of the dollar. In addition, Tuesday’s slump in the yen to a 1-month low on political risks in Japan is bullish for the dollar on a report that Liberal Democratic Party Secretary-General Moriyama intends to step down.
Limiting gains in the dollar were Tuesday’s economic reports, which showed the Aug ISM manufacturing index rose less than expected, and July construction spending declined for the third consecutive month.
Concerns over the Fed’s independence and fears about capital flight are negative for the dollar, particularly following President Trump’s move to fire Fed Governor Lisa Cook. If Mr. Trump succeeds in firing Fed Governor Cook, foreign investors may lose faith in the Fed and the dollar and swap their dollar assets into non-dollar investments.
The US Aug ISM manufacturing index rose +0.7 to 48.7, weaker than expectations of 49.0. The Aug ISM prices paid sub-index unexpectedly fell -1.1 to a 6-month low of 63.7, versus expectations of an increase to 65.0.
US Jul construction spending fell -0.1% m/m, right on expectations, and the third consecutive month that construction spending has declined.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 92% at the September 16-17 FOMC meeting and at 51% for a second -25 bp rate cut at the following meeting on October 28-29.
EUR/USD (^EURUSD) on Tuesday fell by -0.64%. The euro was under pressure on Tuesday from a stronger dollar. The euro fell despite Tuesday’s Eurozone Aug CPI report that showed Aug core CPI rose more than expected, a hawkish factor for ECB policy. Also, hawkish comments from ECB Executive Board member Schnabel and ECB Governing Council member Muller pushed German bund yields higher and were supportive of the euro when they said they favored the ECB keeping interest rates steady at next week’s policy meeting.
The Eurozone Aug CPI rose +2.1% y/y, right on expectations. The Aug core CPI rose 2.3% y/y, stronger than expectations of +2.2% y/y.
ECB Executive Board member Schnabel said the ECB should maintain borrowing costs at current levels with inflation risks tilted to the upside.
ECB Governing Council member Muller said the ECB can afford to keep interest rates steady at next week’s meeting as inflation hovers close to its target and the economy shows resilience.
On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, which is bearish for the euro. Last Friday, German Chancellor Merz and French President Macron called for secondary sanctions on Russia for its war in Ukraine and said they will push for measures targeting “companies from third countries that support Russia’s war.” Last Thursday, German Chancellor Merz stated that a meeting between Russian President Putin and Ukrainian President Zelensky is unlikely to take place. The outcome of the Russian-Ukrainian war could have macroeconomic implications regarding tariffs and oil prices, and could, of course, have significant consequences for European security.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.
USD/JPY (^USDJPY) on Tuesday rose by +0.82%. The yen fell to a 1-month low against the dollar on Tuesday on news that the Secretary General of Japan’s Liberal Democratic Party, Hiroshi Moriyama, a key ally of Prime Minister Ishiba and a proponent of fiscal discipline, is stepping down, which is seen as paving the way toward a more expansionary fiscal policy. The yen also came under pressure after BOJ Deputy Governor Himino reiterated the BOJ’s standing policy of raising interest rates if conditions allow, while failing to provide a timeline of when that might happen. Losses in the yen accelerated after T-note yields rose sharply.
December gold (GCZ25) on Tuesday closed up +76.10 (+2.16%), and December silver (SIZ25) closed up +0.869 (+2.13%). Precious metal prices on Tuesday rallied sharply, with Dec gold climbing to a new contract high and nearest-futures (U25) posting a record high of $3,549.80 an ounce. Also, Dec silver posted a contract high, and nearest-futures (U25) silver posted a 14-year high.
Tuesday’s sharp selloff in stocks boosted safe-haven demand for precious metals. Demand for gold as a store of value also rose Tuesday on concerns of soaring global fiscal deficits after news that the Secretary General of Japan’s Liberal Democratic Party, Hiroshi Moriyama, a key ally of Prime Minister Ishiba and a proponent of fiscal discipline, is stepping down, which is seen as paving the way toward a more expansionary fiscal policy.
In addition, President Trump’s move to fire Fed Governor Lisa Cook has sparked concerns about the Fed’s independence and increased demand for safe-haven assets, including precious metals. In addition, political uncertainty in France is driving demand for gold as a safe-haven, following French Prime Minister Bayrou’s call for a confidence vote that could bring down his government as soon as next month.
Gold has continued safe-haven support related to US tariffs and geopolitical risks, including the conflicts in Ukraine and the Middle East. The fund buying of precious metals continues to support prices, following the rise in gold holdings in ETFs to a 2-year high on Monday and the rise in silver holdings in ETFs to a 3-year high last Friday.
Tuesday’s stronger dollar and higher global bond yields were bearish for precious metals. Also, gains in gold were limited due to hawkish comments from ECB Executive Board member Schnabel and ECB Governing Council member Muller, who said they favored the ECB keeping interest rates steady at next week’s policy meeting.
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.
