Dollar Gains as European Turmoil Weighs on the Euro

The dollar index (DXY00) rallied to a 1.5-year high today and is up by +0.38%.  The dollar is climbing today on increased safe-haven demand as political turmoil in France and Spain weighs on the euro.  The dollar added to its gains today after the prices paid sub-index of the Sep ISM services index rose more than expected to a 4-year high, a hawkish factor for Fed policy. 

Gains in the dollar are limited, with WTI crude oil down more than -1%, which eases inflation expectations that could persuade the Fed to ease monetary policy, a negative factor for the dollar. 

The US Sep ISM services index fell =0.5 to 54.9, slightly weaker than expectations of 55.0.  The Sep ISM services prices paid sub-index rose +1.4 to a 4-year high of 74.0, stronger than expectations of 73.3.

Markets are pricing in a 22% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) tumbled to a 16-month low today and is down by -0.59%.  The euro is under pressure today from political turmoil in Europe and mounting concerns over Europe's public finances.  Policy gridlock in France has undercut the euro, and political turmoil in Spain is rising after Spanish Prime Minister Sanchez called for an early election next month amid mounting social protests over housing costs.  The larger-than-expected decline in the Eurozone Oct Sentix investor confidence index is also weighing on the euro.   On the positive side for the euro is today’s stronger-than-expected Eurozone Aug PPI report, which is hawkish for ECB policy. 

The Eurozone Oct Sentix investor confidence index fell -2.4 to 2.7, weaker than expectations of 4.2.

Eurozone Aug PPI rose +8.2% y/y, stronger than expectations of +7.6% y/y and the largest increase in 3.5 years.

ECB Chief Economist Philip Lane said a measured ECB response is appropriate to control inflation as policymakers assess how a second wave of the energy shock affects the economy.

The markets are discounting an 13% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) is up by +0.18% today.  The yen is sliding today amid a stronger dollar. Also, the downward revision to the Japan Sep S&P PMI services index is weighing on the yen.  In addition, higher T-note yields are undercutting the yen today.

Yen losses are contained today on the stronger-than-expected Japan Sep consumer confidence index. Also, crude oil prices are down more than -1%, which supports Japan’s economy and the yen as Japan imports more than 90% of its energy.

The Japan Sep consumer confidence index fell -0.1 to 35.4, stronger than expectations of 35.3.

The Japan Sep S&P PMI services index was revised downward by -0.3 to 51.3, from the previously reported 51.6.

Markets are pricing in a 14% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) is up +5.70 (+0.14%) today, and December COMEX silver (SIZ26) is up +1.100 (+1.82%).

Precious metals are climbing today as political turmoil in Europe is boosting safe-haven demand for the metals.  Spanish Prime Minister Sanchez called for an early election next month amid mounting social protests over housing costs and after Spain's Parliament rejected a housing plan.  Falling crude prices today are also supportive for precious metals as weaker crude oil prices lower inflation expectations and could prompt the world’s central banks to loosen monetary policy, which is bullish for precious metals. Gold prices also garnered support today after ECB Governing Council member and Bundesbank President Joachim Nagel said rising government debt levels strengthen the case for central banks to increase their gold holdings.

However, precious metals gains are limited today after the dollar index rallied to a 1.5-year high.  Also, signs of global price pressures may prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals, after the US Sep IS price paid sub-index rose to a 4-year high and Eurozone Aug PPI rose at the fastest pace in 3.5 years.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high last Friday.  Long holdings in silver ETFs rose to a 6.25-month high last Tuesday.

Strong central bank demand for gold is supporting gold prices, after the latest news showed 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.