Dollar Moves Higher and Gold Falls on Signs of US Economic Strength

The dollar index (DXY00) today rebounded from a 3-week low and finished up by +0.15% on signs of US economic strength.  An unexpected increase in Tuesday’s US Aug retail sales report sparked short covering in the dollar.  Also, Tuesday’s stronger-than-expected US Aug manufacturing production report was bullish for the dollar. 

The dollar on Tuesday initially moved lower after the 10-year T-note yield fell to a 15-month low on heightened speculation the Fed will cut the fed funds target range by 50 bp at the Tue/Wed FOMC meeting.  Swap markets show that the odds of a 50 bp rate cut rose to 69% Tuesday from 52% last Friday. 

US Aug retail sales unexpectedly rose +0.1% m/m, stronger than expectations of a -0.2% m/m decline. However, Aug retail sales ex-autos rose +0.1% m/m, weaker than expectations of +0.2% m/m.

US Aug manufacturing production rose +0.9% m/m, stronger than expectations of +0.2% m/m and the largest increase in 6 months.

The US Sep NAHB housing market index rose +2 to 41, right on expectations.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Tue/Wed FOMC meeting and at 69% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Tuesday fell back from a 1-week high and finished down by -0.10%.  The euro came under pressure Tuesday after the German Sep ZEW survey expectations of economic growth index rose more than expected to an 11-month low.  Losses in the euro accelerated after the dollar moved higher on the stronger-than-expected US Aug retail sales and Aug manufacturing production reports.

The German Sep ZEW survey expectations of economic growth index fell -15.6 to an 11-month low of 3.6, weaker than expectations of 17.0.

Hawkish comments today from ECB Governing Council member Simkus supported the euro when he said the likelihood of an October interest rate cut by the ECB is "very small."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 30% for the October 17 meeting and at 100% for that 25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Tuesday rose by +0.95%.  The yen came under pressure Tuesday after the dollar strengthened on the stronger-than-expected US Aug retail sales and Aug manufacturing production reports.  Losses in the yen accelerated after T-note yields recovered from early declines and moved higher. 

The yen has support from Tuesday’s stronger-than-expected Japan July tertiary industry index report.  Also, central bank divergence underpins the yen as the Fed is expected to begin cutting interest rates on Wednesday while the BOJ is expected to keep raising rates. 

The Japan July tertiary industry index rose 1.4% m/m, stronger than expectations of +0.9% m/m.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +8% for the October 30-31 meeting.

December gold (GCZ24) Tuesday closed down -16.50 (-0.63%), and December silver (SIZ24) closed down -0.156 (-0.50%).  Precious metals Tuesday posted moderate losses.  Precious metal prices came under pressure Tuesday after the dollar index recovered from a 3-week low and moved higher.  Also, Tuesday’s unexpected increase in US Aug retail sales was hawkish for Fed policy and weighed on precious metals.  In addition, hawkish comments from ECB Governing Council member Simkus undercut gold when he said the likelihood of an October interest rate cut by the ECB is "very small." 

Heightened speculation the Fed will cut interest rates by 50 bp at the Tue/Wed FOMC meeting boosted demand for precious metals as a store of value as the swap markets boosted the chance for a 50 bp rate cut this week to 66% from 52% last Friday.  Silver also garnered support from Tuesday’s stronger-than-expected US Aug manufacturing production report, which was positive for industrial metals demand. 

More Precious Metal News from Barchart

• Dollar Rebounds on Strength in US Economic Reports
• Dollar Weighed Down by Speculation About a 50 bp Fed Rate Cut
• Dollar Undercut by Yen Strength and Speculation of a 50 bp Fed Rate Cut
• Dollar Sinks and Gold Soars to a Record on Talk of 50 bp Fed Rate Cut

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.