Dollar Strengthens as T-Note Yields Soar

The dollar index (DXY00) on Tuesday rose +0.43%.  The dollar Tuesday climbed to a 1-1/2 week high and garnered support from the rise in the 10-year T-note yield to an 11-year high.  Also, a slump in stocks boosted liquidity demand for the dollar.  Expectations for the FOMC on Wednesday to raise interest rates by +75 bp is also supportive of the dollar.

Tuesday’s U.S. housing news was mixed for the dollar.  On the positive side, U.S. Aug housing starts jumped +12.2% m/m to 1.575 million, stronger than expectations of 1.450 million.  Conversely, Aug building permits fell -10.0% m/m to a 2-year low of 1.517 million, weaker than expectations of 1.604 million.

EUR/USD (^EURUSD) on Tuesday fell by -0.61%.   The euro Tuesday gave up overnight gains and moved moderately lower on dollar strength. Also, record-high producer prices in Germany weighed on the euro, along with comments from ECB Governing Council member Muller who said interest rates remain far from levels that would restrict economic expansion.

The German Aug PPI rose by a record +45.8% y/y, stronger than expectations of +36.8% y/y.

ECB Governing Council member Muller called for "sufficiently robust and decisive" action by the ECB to tackle record Eurozone inflation, saying interest rates remain far from levels that would restrict economic expansion.

USD/JPY (^USDJPY) on Tuesday rose by +0.32%.  The yen on Tuesday was under pressure from higher T-note yields as the 10-year T-note yield soared to a new 11-year high.  The yen was also weighed down ahead of the results of the FOMC meeting on Wednesday, when the Fed is expected to raise interest rates by +75 bp, further widening the divergence in monetary policies between the Fed and BOJ. 

Japanese consumer price news Tuesday was hawkish for BOJ policy and supportive of the yen.  Japan's Aug national CPI rose +3.0% y/y, stronger than expectations of +2.9% y/y and the largest increase in nearly 8 years.  Also, Aug national CPI ex-fresh food & energy rose +1.6% y/y, slightly stronger than expectations of +1.5% y/y and the largest increase in nearly 7-1/2 years.

October gold (GCV22) Tuesday closed down -6.60 (-0.40%), and December silver (SIZ22) closed down -0.175 (-0.90%).  Gold and silver Tuesday closed moderately lower.  A rally in the dollar index Tuesday to a 1-1/2 week high was bearish for metals prices.  Gold was also under pressure Tuesday on soaring global government bond yields after the 10-year T-note yield and 10-year UK gilt yield rose to 11-year highs, while the 10-year German bund yield rose to an 8-3/4 year high.  Fund liquidation of gold is another bearish factor for prices as long positions in gold ETFs dropped to an 8-month low Monday. Tuesday’s action by Sweden’s Riksbank to raise interest rates by a larger-than-expected 100 bp also undercut metals prices.  A slide in stocks Tuesday boosted the safe-haven demand for precious metals and limited the downside in prices.

• Stocks Tumble on Soaring Global Bond Yields
• Dollar Slightly Lower as Stocks Recover
• Stocks Mixed Ahead of FOMC Meeting
• Dollar Little Changed on Weak Stocks and Lower Bond Yields