Dollar Tumbles on Lower Bond Yields and Weak U.S. Economic News

The dollar index (DXY00) on Wednesday fell sharply by -1.09%.  The dollar Wednesday fell sharply for a second session and posted a 5-week low.  Lower T-note yields Wednesday weakened the dollar’s interest rate differentials and weighed on the dollar.  The dollar is also under pressure on speculation that recent weaker-than-expected U.S. economic news will prompt the Fed to slow the pace of its rate hikes.

Wednesday’s U.S. economic news was bearish for the economy and the dollar.  Sep wholesale inventories rose +0.8% m/m and Sep retail inventories rose +0.4% m/m.  The rise in inventories is negative for the economy since it suggests weak demand and excess production.  Sep new home sales fell -10.9% m/m to 603,000, although that was slightly stronger than expectations of 580,000.

EUR/USD (^EURUSD) on Wednesday rose by +1.13% and posted a 6-week high.  Dollar weakness Wednesday sparked short covering in the euro.  EUR/USD also has support on expectations that the ECB will increase interest rates by +75 bp at Thursday’s policy meeting.

Wednesday’s Eurozone economic news was mixed for EUR/USD.  On the positive side, French Oct consumer confidence unexpectedly rose +3 to 82, stronger than expectations of a decline to 77.  Conversely, Eurozone Sep M3 money supply rose +6.3% y/y, stronger than expectations of +6.0% y/y and the fastest pace of increase in 7 months. 

USD/JPY (^USDJPY) on Wednesday fell by -1.10%.  Lower T-note yields Wednesday sparked short-covering in the yen.  The yen also moved higher Wednesday after the Japan Aug leading index CI was revised upward by +0.4 to a 4-month high of 101.3 from the previously reported 100.9. A bearish factor for the yen was Wednesday’s action by the BOJ to increase its purchases of 10-year to 25-year debt by 100 billion yen to 350 billion yen and increase purchases of debt due in more than 25 years by 50 billion yen to 150 billion yen.  The BOJ is boosting its yen-negative bond purchases in an attempt to keep the 10-year JGB bond yield from climbing above the 0.25% upper limit of its targeted 0.00%-0.25% 10-year JGB yield range. 

December gold (GCZ22) Wednesday closed up +11.20 (+0.68%), and December silver (SIZ22) closed up +0.137 (+0.71%).  Gold and silver Wednesday closed moderately higher, with gold climbing to a 1-1/2 week high and silver climbing to a 2-week high.  A weaker dollar is bullish for metals prices as the dollar index Wednesday dropped to a 5-week low.  Also, lower global government bond yields Wednesday were bullish for gold prices. In addition, Wednesday’s action by the BOJ to boost its QE purchases supports gold demand as a store of value.  Gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a 2-1/2 year low Tuesday. 

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