Dollar Posts Fresh 20-Year High on Higher T-Note Yields

The dollar index (DXY00) on Tuesday rose +0.61% and posted a new 20-year high. Higher T-note yields Tuesday supported gains in the dollar.  The dollar also found support from a decline in the Chinese yuan to a 2-year low Tuesday against the dollar, a slump in EUR/USD to a 20-year low, and a plunge in the Japanese yen to a 24-year low against the dollar.  In addition, Tuesday's weakness in stocks boosted the dollar's liquidity demand.

Tuesday’s U.S. economic news was bullish for the dollar after the Aug ISM services index unexpectedly rose +0.2 to a 4-month high of 56.9, stronger than expectations of a decline to 55.3.

EUR/USD (^EURUSD) on Tuesday fell by -0.23% and posted a 20-year low.  A stronger dollar Tuesday undercut the euro.  Also, weaker-than-expected Eurozone economic data Tuesday and dovish comments from several ECB policymakers weighed on EUR/USD.

Eurozone economic news Tuesday was bearish EUR/USD.  German July factory orders fell -1.1% m/m, weaker than expectations of -0.7% m/m, and the sixth consecutive month that orders have declined.  Also, the German Aug S&P Global construction PMI fell -1.1 to 42.6, the steepest pace of contraction in 1-1/2 years.

Comments Tuesday from several ECB policymakers were dovish for ECB policy and bearish for EUR/USD. ECB Governing Council member Kazaks said the ECB might slow the pace of interest rate increases if a deep recession dampens inflation.  Also, ECB Governing Council member Centeno said the ECB's inflation goal might be achieved with a slow normalization of monetary policy.  In addition, ECB Governing Council member Stournaras said Eurozone inflation is close to its peak and will start a steady deceleration.

USD/JPY (^USDJPY) on Tuesday rose by +1.56%.  The yen Tuesday plunged to a new 24-year low as higher T-note yields undercut the yen.  The yen was also undercut by divergent central bank policies, with the Fed in the middle of a rate-hike cycle while the BOJ is maintaining QE and record low-interest rates. 

Tuesday’s weaker-than-expected Japanese economic reports were bearish for the yen.  Japan July household spending rose +3.4% y/y, weaker than expectations of +4.6% y/y.  Also, Japan July real cash earnings fell -1.3% y/y, weaker than expectations of -1.2% y/y.

October gold (GCV22) Tuesday closed down -9.60 (-0.56%), and December silver (SIZ22) closed up +0.027 (+0.15%).  Precious metals Tuesday settled mixed.  A rally in the dollar Tuesday to a new 20-year high was bearish for metals prices. Also, higher global bond yields Tuesday were negative for gold prices.  Gold also suffers from continued long liquidation pressure after long gold positions in ETFs fell to a 6-1/2 month low Monday.  Silver prices Tuesday rose slightly after the U.S. Aug ISM services index unexpectedly rose to a 4-month high, a bullish factor for industrial metals demand. 

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