The dollar index (DXY00) on Wednesday fell by -0.24%. Wednesday's rebound in equity markets has curbed liquidity demand for the dollar. Losses in the dollar accelerated on Wednesday as the chances for a Fed rate cut later this month increased after the Jul JOLTS job openings fell more than expected to a 10-month low.
US Jul JOLTS job openings fell -176,000 to a 10-month low of 7.181 million, showing a weaker labor market than expectations of 7.380 million.
US Jul factory orders fell -1.3% m/m, right on expectations, and the second straight month orders have declined.
The Fed Beige Book hinted at signs of stagflation and was bearish for the dollar as it stated that "most of the twelve Federal Reserve districts reported little or no change in economic activity since the prior Beige Book period. Also, across districts, contacts reported flat to declining consumer spending because, for many households, wages were failing to keep up with rising prices. In addition, nearly all districts noted tariff-related price increases, with contacts from many districts reporting that tariffs were especially impactful on the prices of inputs."
Fed Governor Christopher Waller said the fed funds rate is currently above the neutral rate, meaning monetary policy is restricting the economy, and that inflation is likely to move "much closer" to the Fed's goal in six or seven months. He added that the Fed should aim to get ahead of a sharp slowdown in the job market and "we need to start cutting interest rates at the next meeting" and make multiple cuts in the coming months.
St. Louis Fed President Alberto Musalem said, "The current modestly restrictive setting of the policy rate is consistent with today's full employment labor market and core inflation nearly one percentage point above the Fed's 2% target," and it's important to take a "balanced approach" to policy right now and not weight too much to support the labor market or to fight inflation.
Atlanta Fed President Raphael Bostic reiterated that he sees one interest rate cut this year, as price stability remains his primary concern, and it's not unambiguously clear that the labor market is weakening materially.
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.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 95% at the September 16-17 FOMC meeting and at 56% for a second -25 bp rate cut at the following meeting on October 28-29.
EUR/USD (^EURUSD) on Wednesday rose by +0.15%. Dollar weakness on Wednesday supported gains in the euro. The euro also garnered some support from Wednesday's stronger-than-expected Eurozone July PPI report, a hawkish factor for ECB policy. Gains in the euro were limited after the Eurozone Aug S&P composite PMI was revised lower.
Eurozone July PPI eased +0.2% y/y from +0.6% y/y in June, slightly stronger than expectations of +0.1% y/y.
The Eurozone Aug S&P composite PMI was revised downward by -0.1 to 51.0 from the previously reported 51.1.
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 Wednesday fell by -0.19%. The yen recovered from a 1-month low against the dollar on Wednesday and moved higher after the weaker-than-expected US Jul JOLTS job openings report knocked the dollar and T-note yields lower. The yen also garnered some support after Japan's Aug S&P services PMI was revised upward.
The yen initially moved lower on Wednesday on negative carryover from Tuesday's 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 Japan Aug S&P services PMI was revised upward by +0.4 to 53.1 from the previously reported 52.7.
December gold (GCZ25) on Wednesday closed up +43.30 (+1.21%), and December silver (SIZ25) closed up +0.468 (+1.13%). Precious metal prices on Wednesday added to Tuesday's sharp rally, with Dec gold posting a new contract high and nearest-futures (U25) posting a record high of $3,593.70 an ounce. Also, Dec silver posted a contract high, and nearest-futures (U25) posted a 14-year high
Wednesday's weaker dollar was supportive for metals prices. Gains in precious metals accelerated on Wednesday as T-note yields dropped on the weaker-than-expected US Jul JOLTS job openings report, which boosted the odds of a Fed rate cut at the September 16-17 FOMC meeting. Demand for gold as a store of value is also boosting prices due to threats of spiraling budget deficits and sticky inflation. 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. Finally, 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 week.
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 Tuesday and the rise in silver holdings in ETFs to a 3-year high last Friday.
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.
