Dollar Retreats as Stocks and the Euro Rally

The dollar index (DXY00) on Friday fell -by 0.67%.  The dollar index Friday fell to a 1-1/2 week low and posted moderate losses.  A rally in the S&P 500 Friday to a 1-1/2 week high curbed liquidity demand for the dollar.  Also, strength in the euro Friday weighed on the dollar after hawkish ECB comments pushed EUR/USD up to a 3-week high. 

Fed comments Friday were hawkish for Fed policy and bullish for the dollar.   St. Louis Fed President Bullard said he leans "more strongly" toward a 75 bp rate hike when the FOMC meets later this month.  He added, "Wall Street is underpricing the idea that inflation may just be relatively high, and it may take quite a while to bring it back to 2%. This would mean interest rates have to be higher for longer."  Also, Fed Governor Waller said he favors "another significant" increase when the FOMC meets later this month as "inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward."  In addition, Kansas City Fed President George said the U.S. inflation rate is "still far above" the FOMC's 2% target, and policymakers have a "clear-cut" case for continuing to remove monetary support.

EUR/USD (^EURUSD) on Friday rose by +0.49%.  EUR/USD Friday climbed to a 3-week high on positive carry-over from Thursday when the ECB raised its main refinancing rate by 75 bp to 1.25% and said it "expects to raise rates further.”  Also, the euro rose after hawkish ECB comments Friday pushed the 10-year German bund yield to a 2-1/2 month high, strengthening the euro’s interest rate differentials. 

ECB Governing Council member Knot said Thursday's 75 bp rate hike by the ECB was a "powerful and big signal, but more steps should follow."

ECB Governing Council member Kazimir said the ECB needs to continue "resolute" hikes to tackle "unacceptably high" price gains.

ECB Governing Council member Muller warned that delaying interest rate hikes too much risks needing a "much sharper brake on the economy" later to bring prices under control.

France's July manufacturing production fell -1.6%m/m, weaker than expectations of -0.5% m/m and the steepest pace of decline in 17 months.

USD/JPY (^USDJPY) on Friday fell by -0.99%.  The yen Friday rebounded moderately from Wednesday’s 24-year low against the dollar.  Jaw-boning by BOJ Governor Kuroda Friday sparked short-covering in the yen.  Speculation rose that the BOJ may be close to intervening in the forex market to prop up the yen after BOJ Governor Kuroda held a meeting with Japanese Prime Minister Kishida Friday and said, "sudden moves in foreign exchange rates increase uncertainty for firms and are undesirable." 

October gold (GCV22) Friday closed up +8.20 (+0.48%), and December silver (SIZ22) closed up +0.325 (+1.76%).  Gold and silver on Friday posted moderate gains, with gold climbing to a 1-1/2 week high and silver climbing to a 2-week high.  A fall in the dollar index Friday to a 1-1/2 week low supported metals prices. However, gains in gold were limited from continued long liquidation pressure after long gold positions in ETFs fell to a 7-month low Thursday.  Silver prices Friday found support after China bolstered steps to revive its housing market, which may boost its industrial metals demand.

• Stocks Climb as a Fall in Inflation Expectations Boosts Market Sentiment
• Dollar Slips on Strength in Stocks
• Stocks Higher as Inflation Expectations Fall
• Dollar Falls Back on Strong Stocks and Lower T-Note Yields