Dollar Slips as Crude Oil Prices and T-Note Yields Fall

The dollar index (DXY00) fell from a 1-month high on Tuesday, finishing down -0.14%.  The dollar gave up an early advance on Tuesday and moved lower on an unexpected decline in July consumer confidence.  Also, Tuesday’s -4% plunge in WTI crude oil to a 1-week low has lowered inflation expectations that could prompt the Fed to pursue easier monetary policy, a negative factor for the dollar.  In addition, lower T-note yields on Tuesday weakened the dollar’s interest rate differentials.

Losses in the dollar were limited amid some mild short covering ahead of the 2-day FOMC meeting that began on Tuesday.  The dollar is also supported by some safe-haven demand amid heightened tensions in the Middle East.   

The US May S&P composite-20 home price index rose +1.6% y/y, stronger than expectations of +1.3% y/y and the largest increase in 10 months.

The Conference Board US Jul consumer confidence index unexpectedly fell by -1.4 to 90.8, weaker than expectations of an increase to 92.4.

The US Jul Richmond Fed manufacturing survey rose +1 to 5, weaker than expectations of 6.

The markets are discounting a 32% probability of a +25 bp rate hike at the Tue/Wed FOMC meeting.

EUR/USD (^EURUSD) recovered from a 1-month low on Tuesday and rose by +0.17%.  Short covering emerged in the euro on Tuesday after the dollar gave up early gains and turned lower.  The euro also found support after the France Jul consumer confidence survey rose more than expected to a 4-month high.  In addition, Tuesday’s -1% fall in crude oil prices to a 1-week low is supportive of the Eurozone economy and the euro as Europe imports most of its energy. 

The France Jul consumer confidence survey rose +2 to a 4-month high of 86, stronger than expectations of 85.

The markets are discounting an 86% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.06% on Tuesday.  The yen was under pressure on Tuesday, trading just above last Thursday’s 39-year low of 163.99 yen/USD.  Fiscal concerns weighed on the yen on news that the Japanese government plans to cut the sales tax on food and drinks to 1% for two years.  The yen continues to suffer from weak interest rate differentials, with markets discounting only a 4% chance of a +25 bp BOJ rate hike at the next policy meeting on Friday.  The BOJ’s current policy rate of 1.00% is well below the Fed’s federal funds rate target of 3.50%-3.75%.

Losses in the yen were limited amid Tuesday’s -4% decline in crude oil prices to a 1-week low, which is supportive for the Japanese economy and the yen as Japan imports more than 90% of its energy.  Also, Tuesday’s -3% plunge in the Nikkei Stock Index has boosted some safe-haven demand for the yen.  In addition, lower T-note yields on Tuesday were supportive for the yen.  Finally, the yen has support from the ongoing risk of intervention by Japanese authorities to support the yen.  Japanese authorities have intervened in the forex market several times in the past when the yen surpassed 160 yen/USD, as it has this week. 

Fiscal concerns are bearish for the yen after Japanese Finance Minister Satsuki Katayama said she and the premier are aligned in their vision to boost economic growth by implementing measures including a temporary cut to the sales tax on food and drinks to 1% for two years starting next April.

August COMEX gold (GCQ26) on Tuesday closed down -38.30 (-0.94%), and September COMEX silver (SIU26) closed down -1.183 (-2.01%).

Gold and silver prices settled sharply lower on Tuesday.  Precious metals moved lower Tuesday on reduced safe-haven demand as geopolitical risks eased after the US and Iran held off on further strikes against each other for a fourth straight day.  Also, Iran continues negotiations with Oman to reopen the Strait of Hormuz.  In addition, long liquidation and position squaring are weighing on precious metals ahead of the 2-day FOMC meeting that began on Tuesday. 

Losses in precious metals were contained on Tuesday amid a weaker dollar and the -4% plunge in crude oil prices to a 1-week low, which lowers inflation expectations and could prompt central banks worldwide to ease monetary policy, a bullish factor for precious metals.  Also, precious metals prices continue to receive safe-haven support from US-Iran hostilities along with concerns of a widening conflict in the Middle East after Houthi rebels attacked Saudi Arabian ships in the Red Sea over the weekend.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10-month low last Monday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 1-year low on July 14 from the 3.5-year high posted on December 23.

Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China’s PBOC reserves rose by +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.