Dollar Drops on Lower T-Note Yields

The dollar index (DXY00) on Tuesday fell by -0.48% and posted a 1-1/2 month low. The dollar gave up early gains Tuesday and moved lower as a decline in T-note yields weakened the dollar’s interest rate differentials.  Also, a rally in stocks reduced the liquidity demand of the dollar.

The dollar Tuesday initially moved higher as the yuan weakened on concern China will have to maintain or expand pandemic lockdowns after new Covid infections in China climbed to a 6-month high on Monday.

EUR/USD (^EURUSD) on Tuesday rose by +0.58% and posted a 1-1/2 month high.  The euro Tuesday recovered from early losses and climbed to a 1-1/2 month high on dollar weakness and hawkish comments from ECB Governing Council member and Bundesbank President Nagel who said the ECB needs to continue raising interest rates even if it weighs on the economy.

The euro Tuesday was initially under pressure on a Bloomberg report that said Germany’s ruling coalition is planning to more than double net federal borrowing next year.  Bloomberg reported that the German government is targeting net borrowing of 45 billion euros in 2023, compared with an earlier estimate of 17.2 billion euros. 

USD/JPY (^USDJPY) on Tuesday fell by -0.76%.  The yen Tuesday climbed to a 1-1/2 week high against the dollar and posted moderate gains on lower T-note yields.  The yen also moved higher after Japan’s cabinet approved a 29.1 trillion yen ($198 billion) extra budget to fund an economic stimulus package. Tuesday’s Japanese economic news was mixed for the yen.

Japan Sep labor cash earnings rose +2.1% y/y, stronger than expectations of +1.7% y/y and the most in 3-1/4 years.

The Japan Sep leading index CI fell -2.9 to a 1-3/4 year low of 97.4, weaker than expectations of 97.8.

Japan Sep household spending rose +2.3% y/y, weaker than expectations of +2.6% y/y.

December gold (GCZ2) Tuesday closed up +35.50 (+2.11%), and December silver (SIZ22) closed up +0.583 (+2.79%).  Precious metals prices Tuesday rallied sharply, with gold posting a 1-month high and silver climbing to a 4-1/2 month high.  A fall in the dollar index Tuesday to a 1-1/2 month low was bullish for metals prices. Also, rising Covid infections in China boosted safe-haven demand for precious metals after China reported 7,323 new Covid infections on Monday, the most in more than 6 months.  However, gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a new 2-1/2 year low Monday.

• Stocks Climb as T-Note Yields Fall
• Dollar Slips on Strength in Euro and a Rally in Stocks
• Dollar Falls Sharply as Fed Officials Allow for Smaller Rate Hikes
• Stocks Climb on China Optimism and Strength in Chip Stocks