Dollar Surges on Hawkish U.S. August CPI

The dollar index (DXY00) on Tuesday surged by +1.37% on the stronger-than-expected U.S. Aug CPI report, which bolstered expectations for a 75 bp rate hike at next week’s FOMC meeting.  Also, a jump in the 10-year T-note yield to a 2-3/4 month high of 3.456% strengthened the dollar’s interest rate differentials.  In addition, a selloff in stocks Tuesday boosted the liquidity demand for the dollar.

U.S. Aug CPI rose +0.1% m/m and +8.3% y/y, stronger than expectations of -0.1% m/m and +8.1% y/y. U.S. Aug CPI ex-food & energy rose +0.6% m/m and +6.3% y/y, stronger than expectations of +0.3% m/m and +6.1% y/y.

EUR/USD (^EURUSD) on Tuesday fell by -1.41%.  EUR/USD Tuesday was under pressure from a stronger dollar as a jump in the 10-year T-note yield to a 2-3/4 month high strengthened the dollar’s interest rate differentials. 

The euro was also undercut by Tuesday’s news that the German Sep ZEW expectations of economic growth index fell -6.6 points to a nearly 14-year low of -61.9, weaker than expectations of -59.5.

USD/JPY (^USDJPY) on Tuesday rose sharply by +1.13%.  The yen Tuesday gave up overnight gains and sold off sharply and is just above last Wednesday’s 24-year low.  Higher T-note yields Tuesday hammered the yen after the 10-year T-note yield climbed to a 2-3/4 month high.  The stronger than expected U.S. CPI report Tuesday suggests the Fed is still far from pausing its rate-hike cycle, which will widen the divergence between the Fed and BOJ and keep downward pressure on the yen.

Tuesday’s Japanese economic news was supportive of the yen.  Japan’s Q3 BSI large all-industry business conditions rose to 0.4 from -0.9 in Q2.  Also, Japan's Aug PPI was unchanged at 9.0% y/y, slightly stronger than expectations of a decline to 8.9% y/y.

October gold (GCV22) Tuesday closed down -23.70 (-1.37%), and December silver (SIZ22) closed down -0.369 (-1.86%).  Gold and silver Tuesday posted moderate losses.  A sharp rally in the dollar Tuesday undercut metals prices.  Also, Tuesday’s strong U.S. CPI report will force the Fed to continue to aggressively raise interest rates, which is bearish for metals.  Gold prices were also weighed down by higher global bond yields and continued long liquidation pressures after long gold positions in ETFs fell to a 7-month low Monday.

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