Dollar Rallies on Higher T-note Yields and US Economic Strength

The dollar index (DXY00) rallied to a near 1.5-year high today, up +0.34%.  Soaring T-note yields are strengthening the dollar’s interest rate differentials after the 10-year T-note yield rose to a 24-year high of 5.34% today.  Also, signs of strength in the US labor market are hawkish for Fed policy and supportive of the dollar after weekly jobless claims fell to a 10-week low and continuing unemployment claims fell to a 3.5-year low. In addition, today’s +1% increase in WTI crude oil raises inflation expectations and is hawkish for Fed policy, supportive factors for the dollar. 

US weekly initial unemployment claims unexpectedly fell -1,000 to a 10-week low of 197,000, showing a stronger labor market than expectations of an increase to 200,000. Weekly continuing claims unexpectedly fell -11,000 to a 3.5-year low of 1.701 million, showing a stronger labor market than expectations of an increase to 1.725 million. 

The US Sep ISM manufacturing index unexpectedly fell -0.1 to 54.5, weaker than expectations of an increase to 55.0.  The Sep ISM prices paid sub-index rose +8.8 to a 5-month high of 77.9, stronger than expectations of 73.0 and a sign of price pressures.

US Aug construction spending rose +0.9% m/m, stronger than expectations of no change.

Minneapolis Fed President Neel Kashkari said he doesn't know how high interest rates will have to go to cool prices, adding that it's the Fed's job to tame inflation and "we will do what we need to do to get inflation back down to our target." 

Markets are pricing in a 36% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) fell to a 16-month low today and is down by -0.37%.  The euro is being weighed down by a strong dollar.  Also, today’s +1% increase in crude oil prices raises inflation risks and is hawkish for ECB policy, a supportive factor for the euro.  The euro found some support today after the Eurozone Sep S&P manufacturing PMI was revised higher to a 4.25-year high.

The Eurozone Sep S&P manufacturing PMI was revised upward by +0.2 to 52.9 from the previously reported 52.7, the fastest pace of expansion in 4.25 years.

The markets are discounting a 23% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) is up by +0.32% today.  The yen is under pressure today from a stronger dollar. Also, the summary of the September 17-18 BOJ meeting failed to provide clear signals that the BOJ would continue to raise interest rates, weighing on the yen.  In addition, today’s +1% gain in crude oil prices is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  Finally, higher T-note yields today are undercutting the yen. 

The yen has some support today after the Q3 Tankan large manufacturing business conditions survey rose to an 8.5-year high.  Also, today’s increase in Japan’s 10-year JGB bond yield to a 30-year high of 3.128% strengthens the yen’s interest rate differentials. 

The yen also has carryover support from Monday, when Reuters reported that Japan's top currency official, Atsushi Mimura, said that Japan's prime minister and finance minister, along with the US, have recently sent a "very clear" message about the yen's depreciation. His comments have bolstered speculation that Japanese authorities may be preparing another joint intervention with the US to support the yen.

The Japan Q3 Tankan large manufacturing business conditions rose +2 to an 8.5-year high of 24, slightly below expectations of 25.

The summary of the September 17-18 BOJ meeting was neutral for the yen, as one policymaker said, "If signs of an upward deviation in prices are observed, the BOJ will need to accelerate the pace of interest rate hikes."  Conversely, another policymaker said, "Underlying CPI inflation is expected to reach 2% before long, and it does not seem to be accelerating at a speed that could lead the BOJ to fall behind the curve, so there is no need to take hasty action." 

Markets are pricing in an 18% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) is down -2.80 (-0.07%) today, and December COMEX silver (SIZ26) is up +0.594 (+0.98%).

Precious metals are mixed today.  Gold prices gave up an early advance today and fell into negative territory after the dollar index rallied to a 1.5-year high.  Also, today’s surge in global bond yields to multi-decade highs is bearish for precious metals.  In addition, today’s +1% rise in crude oil prices raises inflation expectations and could prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals.  Finally, hawkish comments today from Minneapolis Fed President Neel Kashkari undercut precious metals when he said the Fed will do what it has to do to get inflation back down to target.

Silver prices have support on signs of strength in industrial metals demand after the Eurozone Sep S&P manufacturing PMI was revised upward to a 4.25-year high, and the US Sep ISM manufacturing index remained above 50.0 for the ninth consecutive month, signaling expanding manufacturing activity.  

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Tuesday.  Long holdings in silver ETFs rose to a 6-month high on Wednesday.

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.