The dollar index (DXY00) on Tuesday recovered from a 1.5-month low and rose by +0.36%. Higher T-note yields on Tuesday strengthened the dollar's interest rate differentials and sparked short covering in the dollar. The dollar initially whipsawed lower and then higher on Tuesday after preliminary benchmark payroll revisions to US payrolls in the year through March 2025 showed fewer jobs than previously stated.
Limiting the upside in the dollar are the increased expectations for Fed easing through year-end. 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.
The preliminary benchmark payroll revisions to US payrolls in the year through March 2025 showed -911,000 fewer jobs than previously stated, a wider loss than expectations of -700,000 and a sign of a weaker US labor market.
The markets are now pricing in a 9% chance of a 50 bp rate cut at the upcoming FOMC meeting on Sep 16-17, versus the previous expectations of a zero chance of that 50 bp rate cut. After the fully expected -25 bp rate cut at the Sep 16-17 FOMC meeting, the markets are now discounting a 75% chance of a second -25 bp rate cut at the Oct 28-29 meeting, up from a 54% chance as of late Thursday. The markets are now pricing in an overall -73 bp rate cut in the federal funds rate by year-end to 3.65% from the current 4.38% rate.
EUR/USD (^EURUSD) fell from a 1.5-month high on Tuesday and finished down by -0.50% due to a rebound in the dollar. The euro was also pressured after French Jul manufacturing production posted its steepest decline in 14 months. The euro initially moved higher on Tuesday due to central bank divergence as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates three times by the end of this year.
French Jul manufacturing production fell -1.7% m/m, weaker than expectations of -1.2% m/m and the largest decline in 14 months.
On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, which is bearish for the euro. Also, political uncertainty in France is negative for the euro, with French Prime Minister Bayrou resigning after losing a confidence motion in parliament on Monday.
Swaps are pricing in no chance of a -25 bp rate cut by the ECB at Thursday's policy meeting.
USD/JPY (^USDJPY) on Tuesday fell by -0.03%. The yen rallied to a 3-week high against the dollar on Tuesday after Bloomberg News reported that people familiar with the matter said that BOJ officials are of the view that it may be possible to raise rates again this year, regardless of domestic political instability, as economic conditions have developed in line with expectations. The yen also found support from Tuesday's Japanese economic news that showed Aug machine tool orders posted their biggest increase in 5 months. However, the yen fell back from its best level and posted only modest gains as T-note yields rose.
Political uncertainty in Japan is bearish for the yen after Japanese Prime Minister Ishiba said he will step down 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.
Japan Aug machine tool orders rose +8.1% y/y, the biggest increase in 5 months.
December gold (GCZ25) on Tuesday closed up +4.80 (+0.13%), and December silver (SIZ25) closed down -0.561 (-1.34%). Precious metal prices settled mixed on Tuesday, with Dec gold posting a contract high and nearest-futures (U25) posting a record high of $3,670.40 an ounce. Expectations for Fed interest rate cuts through year-end are boosting demand for precious metals as a store of value. Also, increased gold buying from China's central bank is supportive for prices after the PBOC boosted its gold purchases by +0.06 million troy ounces in August to 74.02 million troy ounces, marking the tenth consecutive month the central bank has increased its gold reserves. Strength in the dollar and higher global government bond yields on Tuesday limited gains in gold.
Concern that a weaker-than-expected US labor market will lead to reduced demand for industrial metals undercut silver prices on Tuesday after the preliminary benchmark payroll revisions to US payrolls in the year through March 2025 showed fewer jobs than previously stated, a sign of a weak labor market.
Gold prices continue to receive support from uncertainty tied to US tariffs and geopolitical risks. Also, political uncertainty in France and Japan is driving demand for gold as a safe-haven asset. French Prime Minister Bayrou resigned after losing a confidence vote in parliament on Monday, and Japanese Prime Minister Ishiba said he will step down 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 Monday, and silver holdings in ETFs rose to a 3-year high last Wednesday.
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.
