Dollar Slightly Lower as T-Note Yields Fall

The dollar index (DXY00) fell from a new 1.5-month high on Thursday and finished down by -0.03%.  The dollar posted modest losses on Thursday as a sharp rally in stocks curbed demand for dollar liquidity.  Lower T-note yields on Thursday also weighed on the dollar. 

Dollar losses were limited Thursday after US weekly jobless claims unexpectedly fell to an 8-week low, signaling a strong labor market.  The dollar also has carryover support from Wednesday when the FOMC raised interest rates by 25 bp and signaled another rate hike by the end of the year.

US weekly initial unemployment claims unexpectedly fell -10,000 to an 8-week low of 196,000, showing a stronger labor market than expectations of an increase to 207,000.

US Aug housing starts unexpectedly fell -2.6% m/m to 1.275 million, weaker than expectations of an increase to 1.320 million.  Aug building permits, a proxy for future construction, fell -2.7% m/m to 1.394 million, weaker than expectations of 1.408 million.

The US Sep Philadelphia Fed business outlook survey fell -9.6 to 37.8, stronger than expectations of 32.1.

US Aug pending home sales unexpectedly rose +0.3% m/m, stronger than expectations of a -0.1% m/m decline. 

Markets are pricing in a 55% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) recovered from a 1.5-month low today and finished up by +0.11%.  Thursday’s weaker dollar spurred short covering in the euro.  Also, weaker crude oil prices on Thursday were supportive of the Eurozone economy and the euro, as Europe is heavily dependent on imported oil. Euro gains were contained on Thursday after Eurozone Aug CPI was revised lower, a dovish factor for ECB policy.

Eurozone Aug CPI was revised lower to +3.2% y/y from the previously reported +3.3% y/y.  Aug Core CPI was left unrevised at +2.4% y/y.

The markets are discounting a 54% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell by -0.17% on Thursday.  The yen strengthened on Thursday, supported by lower crude oil prices, which support Japan’s economy and the yen, as Japan imports more than 90% of its energy.  Lower T-note yields on Thursday were also bullish for the yen.  In addition, the yen is supported by expectations that the BOJ will raise interest rates by 25 bp at Friday’s policy meeting.

The yen has some carryover support from last Tuesday, when the Japanese health minister, who oversees the Government Pension Investment Fund (GPIF) that holds $2.1 trillion in assets, said the fund is still considering whether it needs to review its asset allocation.  The recent jump in the 10-year Japanese JGB government bond yield to a 30-year high has fueled speculation that the GPIF may boost its allocation to Japanese government bonds, which would support the yen.

Markets are pricing in a 100% chance of a +25 bp BOJ rate hike at Friday’s policy meeting.  The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. 

December COMEX gold (GCZ26) closed up +12.20 (+0.28%) on Thursday, and December COMEX silver (SIZ26) closed up +1.176 (+1.81%).

Precious metals prices settled higher on Thursday, with silver up sharply at a 1-week high.  Falling global bond yields on Thursday were bullish for precious metals.  Weaker crude oil prices on Thursday were also positive for precious metals, as lower crude prices ease inflation expectations and could persuade global central banks to pursue easier monetary policies, a bullish factor for precious metals.  In addition, the BOE's decision not to raise interest rates on Thursday boosted demand for precious metals as a store of value, amid concerns that the BOE is falling behind the curve on inflation. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.5-month high on Thursday.  Long holdings in silver ETFs rose to a 5.5-month high on August 25.

Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC boosted its gold reserves.

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.