Dollar Slips on Strength in Stocks

The dollar index (DXY00) on Thursday fell -by 0.13%.  The dollar Thursday gave up early gains and moved moderately lower. Strength in stocks Thursday curbed liquidity demand for the dollar.  The dollar Thursday initially moved higher on comments from Fed Chair Powell, who warned against prematurely loosening monetary policy.  Also, Thursday’s unexpected decline in U.S. weekly jobless claims to a 3-month low was hawkish for Fed policy and supportive of the dollar.

Comments Thursday from Fed Chair Powell were hawkish for Fed policy and bullish for the dollar when he said the Fed will not stop in its efforts to curb inflation "until the job is done."  He added that "the Fed has and accepts responsibility for price stability" and that history cautions against prematurely loosening monetary policy. However, comments from Chicago Fed President Evans were slightly dovish and bearish for the dollar when he said he favors raising the fed funds rate to 4% and then pausing as overtightening becomes a concern once rates get to the 3.5% range.

Thursday’s U.S. economic news was mixed for the dollar.  On the bearish side, July consumer credit rose +$23.811 billion, weaker than expectations of +$32.000 billion.  Conversely, weekly initial unemployment claims unexpectedly fell -6,000 to a 3-month low of 222,000, showing a stronger labor market than expectations of an increase to 235,000.

EUR/USD (^EURUSD) on Thursday fell by -0.09%.  EUR/USD Thursday gave up an early advance and turned lower on comments from ECB President Lagarde, who warned of risks to growth and higher unemployment as the economy slows.  The euro was also under pressure after the ECB Thursday raised its inflation outlook for this year and next year, and Lagarde noted that it might turn out higher than anticipated.  EUR/USD Thursday initially moved higher after the ECB raised its main refinancing rate by 75 bp to 1.25% and said it "expects to raise rates further.”

The ECB raised its Eurozone 2022 GDP forecast to 4.1% from a prior estimate of 2.8% and raised its Eurozone 2022 inflation forecast to 8.1% from a previous forecast of 6.8%.  The ECB cut its Eurozone 2023 GDP forecast to 0.9% from a prior forecast of 2.1% and raised its 2023 inflation forecast to 5.5% from a prior view of 3.5%.

The ECB today raised its main refinancing rate by +75 bp to 1.25%, and its deposit facility rate by +75 bp to 0.75%, and said it "expects to raise rates further because inflation remains far too high and is likely to stay above target for an extended period."

USD/JPY (^USDJPY) on Thursday rose by +0.15%.  The yen Thursday posted modest losses and held above Wednesday’s 24-year low against the dollar.  Divergent central bank policies continue to pressure the yen after the ECB Thursday raised interest rates, and Fed Chair Powell said the Fed would continue to raise rates to curb inflation.  The yen rose briefly Thursday after Japan’s top currency official warned that he wouldn’t rule out any options should the recent moves in the currency markets continue.

Thursday’s Japanese economic news was bullish for the yen.   Japan Q2 GDP was revised upward to +3.5% (q/q annualized) from +2.2%, stronger than expectations of +2.9%.  Also, the Japan Aug eco watchers outlook survey rose +6.6 to 49.4, stronger than expectations of 44.9.

October gold (GCV22) Thursday closed down -7.60 (-0.44%), and December silver (SIZ22) closed up +0.182 (+1.00%).  Precious metals Thursday settled mixed, with silver climbing to a 1-week high.  A weaker dollar Thursday was bullish for metals prices. Gold was under pressure after the ECB Thursday raised interest rates, and Fed Chair Powell said the Fed would continue to raise rates.  Gold also suffers from continued long liquidation pressure after long gold positions in ETFs fell to a 7-month low Wednesday.  Silver prices found support on signs of stronger industrial metals demand after Japan Q2 GDP was revised upward to +3.5% (q/q annualized) from +2.2%.

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