Dollar Falls Back on Strong Stocks and Lower T-Note Yields

The dollar index (DXY00) Wednesday retreated from a 20-year high and fell -by 0.37%.  The dollar Wednesday gave up an early advance as a sharp rally in stocks curbed liquidity demand for the dollar.  Also, lower T-note yields Wednesday undercut the dollar.  In addition, long liquidation pressures weighed on the dollar ahead of Fed Chair Powell’s speech on monetary policy before the Cato Institute on Thursday.  The dollar maintained moderate losses Wednesday Afternoon when the Fed Beige Book was released.

Wednesday’s U.S. economic news was bearish for the dollar after the July trade deficit was -$70.7 billion, wider than expectations of -$70.2 billion, which has negative implications for Q3 GDP.

The Fed’s Beige Book was generally bearish for the dollar.  The Fed Beige book said, "the outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months."  Price levels "remained highly elevated," but nine of 12 Fed districts reported some degree of moderation in their rate of increase.

Fed comments Wednesday were hawkish for Fed policy and bullish for the dollar.  Fed Vice Chair Brainard said the Fed is in it for "as long as it takes" to curb inflation, and "monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target."  Also, Cleveland Fed President Mester said she doesn't have a recession in her baseline outlook and reiterated that she backs hiking the fed funds rate above 4% by early 2023 and leaving it there for some time to combat inflation.  In addition, Richmond Fed President Barkin said the Fed must raise interest rates to a level that restrains economic activity and keep them there until policymakers are "convinced" that inflation is subsiding.

EUR/USD (^EURUSD) on Wednesday rose by +0.96%.  Better-than-expected Eurozone economic reports Wednesday on Q2 Eurozone GDP and German industrial production gave the euro a boost.  Also, a fall in the dollar Wednesday from a 20-year high sparked short-covering in the euro.  In addition, expectations for the ECB to raise interest rates by at least 50 bp at Thursday’s policy meeting are supporting EUR/USD.

Eurozone economic news Wednesday was bullish for EUR/USD.  Eurozone Q2 GDP was revised upward to +0.8% q/q and +4.1% y/y from the originally reported +0.6% q/q and +3.9% y/y.  Also, German July industrial production fell -0.3% m/m, stronger than expectations of -0.6% m/m.

USD/JPY (^USDJPY) on Wednesday rose by +0.83%.  The yen Wednesday sank to a new 24-year low against the dollar. A jump in the 10-year JGB bond yield Wednesday to a 2-1/2 month high of 0.258% prompted the BOJ to boost its bond buying, which is bearish for the yen.  The BOJ announced Wednesday that it would boost the amount of bonds it purchases for 5-10 year maturities to 550 billion yen from 500 billion yen.  The BOJ is boosting its bond buying to keep bond yields from rising as the 10-yer JGB bond yield broke out above the bank’s 0.25% upper limit of its targeted yield range. 

Wednesday’s Japanese economic news was bearish for the yen after the Japan July leading index CI fell -0.7 to a 17-month low of 99.6, weaker than expectations of 100.2. 

October gold (GCV22) Wednesday closed up +14.80 (+0.87%), and December silver (SIZ22) closed up +0.352 (+1.97%).  Precious metals Wednesday posted moderate gains.  A weaker dollar Wednesday was bullish for metals prices.  Also, lower global bond yields Wednesday were supportive of gold prices.  Gold still suffers from continued long liquidation pressure after long gold positions in ETFs fell to a 6-3/4 month low Tuesday.  Silver prices Wednesday found support after Eurozone Q2 GDP was revised higher, a bullish factor for industrial metals demand. 

• The US Dollar Index and the Three Mothers
• Stocks Push Higher as T-Note Yields Fall
• Dollar Posts Fresh 20-Year High on Higher T-Note Yields
• Rising T-Note Yields Weigh on Stocks