Dollar Slips as the Yen Jumps on Intervention Warnings

The dollar index (DXY00) on Wednesday fell by -0.12%.   The dollar was undercut by reduced liquidity demand after stock prices stabilized following Tuesday’s rout.  Also, hawkish ECB comments Wednesday gave the euro a boost.  The yen strengthened on concerns that Japan may be close to intervening in forex markets to support the yen.  Losses in the dollar were limited after the 10-year T-note yield Wednesday rose to a new 2-3/4 month high, which strengthened the dollar’s interest rate differentials.

Wednesday’s U.S. producer price report was mixed.  On the positive side, Aug PPI final demand fell -0.1% m/m, matching estimates, and rose +8.7% y/y, a smaller pace of increase than expectations of +8.8% y/y. However, Aug PPI ex-food & energy rose +0.4% m/m and +7.3% y/y, stronger than expectations of +0.3% m/m and +7.0% y/y.

EUR/USD (^EURUSD) on Wednesday rose by +0.04% on dollar weakness and hawkish ECB comments.  Gains in EUR/USD were limited after Wednesday’s economic news showed Eurozone July industrial production fell more than expected and posted its steepest decline in 11 months.

ECB Chief Economist Lane said inflation remains far too high, and last week's 75 bp rate hike by the ECB was "appropriate."

ECB Governing Council member Simkus said, "inflation trends in the Eurozone are strong. Therefore, at least a 50 bp increase in interest rates is needed" next month. 

ECB Governing Council member Kazaks said the ECB may have to continue raising interest rates beyond February to bring inflation back to its 2% target as “the risks of second-round effects are there, upside risks to inflation are there, and monetary policy still is accommodative.” 

Eurozone July industrial production fell -2.3% m/m, weaker than expectations of -1.1% m/m and the biggest decline in 11 months.

USD/JPY (^USDJPY) on Wednesday fell by -0.96%.  The yen Wednesday recovered from overnight losses and rallied moderately.  The yen climbed on jawboning from Japan’s top currency official and after the BOJ conducted a rate check in currency markets, a possible precursor for currency intervention. Higher T-note yields were bearish for the yen.

Masato Kanda, Japan's top currency official at the finance ministry, said Wednesday that there's no choice but to take necessary responses to speculative forex moves because excessive, unruly forex moves harm the economy and financial markets.

Wednesday’s Japanese economic news was mixed for the yen.  On the positive side, Japan's July core machine orders rose +5.3% m/m and +12.8% y/y, stronger than expectations of -0.6% m/m and +6.6% y/y.  Conversely, Japan's July industrial production was revised downward to +0.8% m/m from the originally reported +1.0% m/m.

October gold (GCV22) Wednesday closed down -8.90 (-0.52%), and December silver (SIZ22) closed up +0.078 (+0.40%).  Gold and silver Wednesday settled mixed.  Higher T-note yields Wednesday weighed on gold prices after the 10-year T-note yield rose to a 2-3/4 month high.  A weaker dollar Wednesday limited losses in gold and pushed silver prices higher. Gold prices are still weighed down by long liquidation pressures after long gold positions in ETFs fell to a 7-month low Tuesday.

• Stocks Mixed as Inflation Concerns Remain
• Dollar Surges on Hawkish U.S. August CPI
• Stocks Plummet as a Disappointing CPI Report Sends T-Note Yields Soaring
• Dollar Weakens on Euro Strength