Dollar Rallies as T-Note Yields Climb and Stocks Fall

The dollar index (DXY00) on Wednesday rose by +0.76%.  Strength in T-note yields Wednesday gave the dollar a boost after the 10-year T-note yield climbed to a 14-year high.  Also, weakness in stocks Wednesday boosted the liquidity demand for the dollar.  In addition, weakness in the yen supported the dollar after the yen sank to a new 32-year low against the dollar on Wednesday.

Wednesday’s U.S. housing news was mixed for the dollar.  On the bearish side, Sep housing starts fell -8.1% m/m to 1.439 million, weaker than expectations of 1.461 million.  Conversely, Sep building permits, a proxy for future construction, unexpectedly rose +1.4% m/m to 1.564 million, stronger than expectations of a decline to 1.530 million.

Wednesday’s Fed Beige Book was slightly hawkish for Fed policy and supportive of the dollar.  The Beige Book said the U.S. economy grew "modestly" through early October, but performances were mixed in different parts of the country.  Also, "price growth remained elevated, though some easing was noted across several districts."

Comments from Minneapolis Fed President Kashkari were hawkish for Fed policy and bullish for the dollar when he said the Fed can't pause its campaign of monetary policy tightening once the fed funds rate reaches 4.50% to 4.75% if "underlying" inflation is still accelerating.

EUR/USD (^EURUSD) on Wednesday fell by -0.88%.  Dollar strength Wednesday weighed on the euro. EUR/USD was also under pressure on concern that higher interest rates might push the Eurozone economy into recession after ECB Governing Council member Vasle said the ECB "should raise interest rates by 75 bp at its next two meetings in October and December." 

Wednesday’s Eurozone economic news was mixed for EUR/USD.  On the bearish side, Eurozone Aug construction output fell -0.6% m/m. Conversely, Eurozone Sep CPI was revised downward by -0.1 to 9.9% y/y from the previously reported 10.0% y/y.

ECB Governing Council member Vasle said the ECB "should raise interest rates by 75 bp at its next two meetings in October and December" to bring Eurozone rates "close to what we estimate" is a neutral level.

USD/JPY (^USDJPY) on Wednesday rose by +0.42%.  The yen on Wednesday moved lower for the eleventh consecutive session and posted a new 32-year low against the dollar.  Higher T-note yields Wednesday weighed on the yen.  Also, comments Wednesday from BOJ Board member Adachi undercut the yen when he said it would be "premature and undesirable for Japan's economy" for the BOJ to adjust monetary policy in response to the weakening yen. 

December gold (GCZ22) Wednesday closed down -21.60 (-1.30%), and December silver (SIZ22) closed down -0.241 (-1.30%).  Gold and silver Wednesday closed moderately lower, with gold falling to a 3-week low. A stronger dollar Wednesday undercut metals prices.  Higher global government bond yields Wednesday also pressured gold prices. Metals prices also fell after Wednesday’s economic news showed stronger-than-expected Sep consumer prices in the UK and Canada, which will pressure global central banks to keep raising interest rates.  Gold prices continue to be undercut by fund liquidation as long positions in gold ETF’s dropped to a new 2-1/4 year low Monday. 

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