The dollar index (DXY00) today is up by +0.07%. The dollar is posting modest gains today ahead of the results of today’s FOMC meeting. Weakness in stocks today is boosting some liquidity demand for the dollar. Gains in the dollar are muted after the US Aug housing starts and building permits reports fell more than expected.
The dollar remains under pressure on expectations for the Fed to cut interest rates by -25 bp at today’s conclusion of the 2-day FOMC meeting. Also, increased expectations for Fed easing through year-end are bearish for the dollar.
The dollar is also being undercut by concerns over Fed independence, which could prompt foreign investors to dump dollar assets as President Trump attempts to fire Fed Governor Cook, and by Stephen Miran’s intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors.
US Aug housing starts fell -8.5% m/m to 1.307 million, weaker than expectations of 1.365 million. Aug building permits, a proxy for future construction, unexpectedly fell -3.7% m/m to a 5.25-year low of 1.312 million, weaker than expectations of an increase to 1.370 million.
The markets are pricing in a 100% chance of a -25 bp rate cut and a 7% chance of a 50 bp rate cut at today’s conclusion of 2-day FOMC meeting. After the fully expected -25 bp rate cut at this week’s meeting, the markets are discounting an 86% chance of a second -25 bp rate cut at the next FOMC meeting on Oct 28-29. The markets are now pricing in an overall -69 bp rate cut in the federal funds rate by year-end to 3.64% from the current 4.33% rate.
EUR/USD (^EURUSD) today is down by -0.09%. The strength of the dollar today is weighing on the euro. Also, today’s downward revision to Eurozone Aug CPI is dovish for ECB policy and negative for the euro.
Central bank divergence is supporting the euro, as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates by roughly three times by the end of this year.
Eurozone Aug CPI was revised lower to +2.0% y/y from the previously reported +2.1% y/y. The Aug core CPI was left unrevised at +2.3% y/y.
Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) today is down by -0.16%. The yen climbed to a 1.75-month high against the dollar today. The yen has carryover support from Tuesday, when Japanese Minister of Agriculture Koizumi said he will run in the party leadership race of the ruling Liberal Democratic Party. Koizumi is seen as hawkish on fiscal policy and less likely to try to influence the BOJ’s interest rate path. Lower T-note yields today are also supportive for the yen.
Japanese trade news was mixed for the yen. Japan Aug exports fell -0.1% y/y, a smaller decline than expectations of -2.0% y/y. Aug imports fell -5.2% y/y, weaker than expectations of -4.1% y/y.
December gold (GCZ25) today is down -8.50 (-0.23%), and December silver (SIZ25) is down -0.542 (-1.27%). Precious metal prices are moving lower today due to a stronger dollar. Also, long liquidation pressures are weighing on precious metals prices ahead of the FOMC decision later today. Silver prices extended their losses today after US Aug housing starts and building permits fell more than expected, a bearish factor for industrial metals demand.
On Tuesday, nearest-futures (U25) gold posted an all-time high of $3,698.60 an ounce, and nearest-futures (U25) silver posted a 14-year high. Expectations for at least a -25 bp rate cut by the Fed at today’s FOMC meeting are supportive for precious metals. The markets are also pricing in roughly three Fed rate cuts by year-end, a bullish factor for precious metals.
Gold prices continue to receive safe-haven support from uncertainty tied to US tariffs and President Trump’s attacks on Fed independence as he attempts to fire Fed Governor Cook, and by Stephen Miran’s intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors. Geopolitical risks and political uncertainty in France and Japan are also driving demand for gold as a safe-haven asset. French Prime Minister Bayrou resigned after losing a confidence vote in parliament last week. Also, Japanese Prime Minister Ishiba resigned last week following two election results that stripped Japan’s ruling Liberal Democratic Party of its majorities in both houses of parliament, which is seen as paving the way toward a more expansionary fiscal policy.
Precious metals prices continue to receive support from fund buying of precious metal ETFs. Gold holdings in ETFs rose to a 2.25-year high on Tuesday, and silver holdings in ETFs rose to a 3-year high on September 3.
