The dollar index (DXY00) on Tuesday rose by +0.03%. The dollar posted slight gains on Tuesday on some mild short covering after last Friday’s and Monday’s losses. Higher T-note yields on Tuesday were supportive of the dollar. Also, Tuesday’s news that showed the US Jun trade deficit shrank to a 1.75-year low was bullish for the dollar.
The dollar gave up most of its advance Tuesday after the Jul ISM services index unexpectedly declined. Also, dovish comments late Monday from San Francisco Fed President Mary Daly were bearish for the dollar when she said the time is nearing for Fed interest rate cuts with the labor market softening and no signs of tariff-induced inflation. The dollar still has a negative carryover from last Friday’s weaker-than-expected US payroll and ISM manufacturing reports, which bolstered speculation that the Fed may cut interest rates as soon as next month.
Also, questions about the Fed’s credibility are weighing on the dollar after Fed Governor Adriana Kugler resigned last Friday, which could prompt President Trump to nominate a new governor who is more dovish and could undermine Fed Chair Powell’s influence.
The US Jun trade deficit shrank to -$60.2 billion from -$71.7 billion in May, better than expectations of -$61.0 billion and the smallest deficit in 1.75 years.
The US Jul ISM services index unexpectedly fell -0.7 to 50.1, weaker than expectations of an increase to 51.5. The Jul ISM services prices paid sub-index unexpectedly rose +2.4 to a 2.75-year high of 69.9, versus expectations of a decline to 66.5.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 94% at the September 16-17 FOMC meeting and 62% at the following meeting on October 28-29.
EUR/USD (^EURUSD) Tuesday fell by -0.02%. The euro posted modest losses Tuesday due to a slightly stronger dollar. Also, Tuesday’s downward revision to the Eurozone Jul S&P composite PMI was bearish for the euro. In addition, the euro is struggling due to concerns that President Trump’s tariff policies will curb economic growth in the Eurozone.
The Eurozone Jul S&P composite PMI was revised downward by -0.1 to 50.9 from the previously reported 51.0.
Swaps are pricing in a 16% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.
USD/JPY (^USDJPY) Tuesday rose by +0.41%. The yen fell from a 1.5-week high against the dollar on Tuesday and turned lower after the minutes of the June 16-17 BOJ meeting showed policymakers were concerned about ending its QE program too quickly. Also, Tuesday’s decline in the 10-year JGB Japanese government bond yield to a 4-week low of 1.465% weakened the yen’s interest rate differentials. In addition, higher T-note yields on Tuesday weighed on the yen.
The Japan Jul S&P composite PMI was revised upward by +0.1 to 51.6 from the previously reported 51.5.
The minutes of the June 16-17 BOJ meeting were slightly dovish as many board members held the view that if the BOJ cuts its buying of Japanese government bonds too quickly, it might have an unforeseen impact on market stability.
December gold (GCZ25) on Tuesday closed up +8.30 (+0.24%), and September silver (SIU25) closed up +0.495 (+1.33%). Precious metals settled higher on Tuesday. Dovish comments from San Francisco Fed President Mary Daly gave precious metals a boost when she said the time is nearing for Fed interest rate cuts. Also, demand for gold as an inflation hedge rose Tuesday on signs of price pressures after the July ISM services prices paid sub-index unexpectedly rose +2.4 to a 2.75-year high of 69.9. Precious metals have carryover support from last Friday’s weaker-than-expected US July payroll and July ISM manufacturing reports, which boosted speculation that the Fed may cut interest rates as soon as next month. The chance of a Fed interest rate cut at the September FOMC meeting has risen to 94% Tuesday from 40% last Friday.
Precious metals prices also have safe-haven support on concerns that President Trump’s tariff policies will weigh on global economic growth prospects. Finally, precious metals continue to receive safe-haven support from geopolitical risks, including the conflicts in Ukraine and the Middle East. However, Tuesday’s stronger dollar and higher T-note yields limited gains in precious metals.
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.
