Dollar Strengthens with T-Note Yields

The dollar index (DXY00) rose by +0.07% on Friday.  The dollar found support Friday from higher T-note yields, which strengthened the dollar’s interest rate differentials.  Dollar gains were limited, however, after the University of Michigan US Oct consumer sentiment index fell more than expected to a 5-month low.  Also, a stronger Chinese yuan weighed on the dollar after it climbed to a 4-year high against the dollar on Friday.

The University of Michigan US Oct consumer sentiment index fell -1.8 to a 5-month low of 46.3, weaker than expectations of 47.6.

The University of Michigan US Oct 1-year inflation expectations rose to a 5-month high of 4.7% from 4.6% in Sep, and the Oct 5-10 year inflation expectations rose to a 5-month high of 3.5% from 3.4% in Sep.

Markets are pricing in a 19% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) fell by -0.08% on Friday.  Dollar strength on Friday weighed on the euro. Also, the larger-than-expected decline in Italy’s Aug industrial production report was bearish for the euro.

Italy's Aug industrial production fell -1.3% m/m, weaker than expectations of no change and the biggest decline in a year.

The markets are discounting a 12% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.23% on Friday.  The yen was under pressure Friday from a stronger dollar and higher T-note yields.  The Japan 10-year JGB yield also fell to a 3-week low of 3.009%, narrowing the yen’s interest-rate differentials and weighing on the yen.  Losses in the yen were contained by Friday’s better-than-expected Japanese economic news on Sep machine tool orders and Aug household spending.

Markets are pricing in a 9% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up +59.30 (+1.43%) on Friday, and December COMEX silver (SIZ26) closed up +1.624 (+2.73%).

Precious metals prices settled sharply higher on Friday.  Strong demand for gold by investors and central banks is supporting prices.  Long gold holdings in ETFs rose to a 4-year high on Thursday, and China this week reported that the People's Bank of China (PBOC) boosted its gold reserves by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years.

On the negative side for precious metals on Friday were a stronger dollar and higher T-note yields. Stronger stocks on Friday also reduced safe-haven demand for precious metals.   

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Thursday.  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 Thursday’s news showed that bullion held in China's PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third 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.