Dollar Finds Support on Higher T-Note Yields

The dollar index (DXY00) rose by +0.04% on Friday.  The dollar recovered from a 6-week low on Friday and posted modest gains as higher T-note yields strengthened the dollar’s interest rate differentials. The dollar also found support on stronger-than-expected US economic news, including the Q2 employment cost index, the Jul MNI Chicago PMI, and the University of Michigan US Jul consumer sentiment index. In addition, Friday’s +1% increase in WTI crude oil prices raises inflation expectations and could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. 

Hawkish comments on Friday from Dallas Fed President Lorie Logan were supportive of the dollar when she said, “Without any policy restraint, inflation will likely continue to trend above target until there’s an unanticipated shock.  Modest action in the near term would reduce the likelihood of needing to take sharper action later.”

The US Q2 employment cost index rose +0.9%, stronger than expectations of +0.8%.

The US Jul MNI Chicago PMI unexpectedly rose +0.9 to 57.6, stronger than expectations of a decline to 56.0.

The University of Michigan US Jul consumer sentiment index was unexpectedly revised upward to a 5-month high of 55.2, stronger than expectations of a downward revision to 54.0.

The markets are discounting a 67% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) rose by +0.03% on Friday.  The euro posted modest gains on Friday after France’s July CPI rose more than expected, a hawkish factor for ECB policy.  Gains in the euro were limited on weaker-than-expected German employment news.  Also, Friday’s +1% increase in crude oil prices is negative for the Eurozone economy and the euro as Europe imports most of its energy.

German July unemployment rose +6,000, showing a weaker labor market than expectations of +5,000.  The Jul unemployment rate unexpectedly rose +0.1 to 6.4%, weaker than expectations of no change at 6.3%.

France Jul CPI rose +0.6% m/m and +2.1% y/y, stronger than expectations of +0.3% m/m and +1.8% y/y.

The markets are discounting a 90% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) fell by -0.26% on Friday.  The yen recovered from early losses on Friday and moved higher on speculation that the US may join Japan in intervening in the forex market to support the yen after Treasury Secretary Bessent said he considers the yen to be “very undervalued” and that excess volatility is not healthy.  The yen also found support on Friday after the BOJ raised its 2026 Japan GDP forecast and lowered its core CPI forecast. In addition, Friday’s stronger-than-expected Tokyo July CPI report is hawkish for BOJ policy and supportive for the yen.

The yen initially moved lower on Friday after the BOJ kept interest rates unchanged.  Also, higher T-note yields on Friday were bearish for the yen.  In addition, Friday’s +1% rally in crude oil prices is bearish for the Japanese economy and the yen as Japan imports more than 90% of its energy.

The yen continues to suffer from weak interest rate differentials, with markets discounting only a 42% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. The BOJ’s current policy rate of 1.00% is well below the Fed’s federal funds rate target of 3.50%-3.75%.

Japan Jun industrial production rose +1.3% m/m, stronger than expectations of +1.0% m/m and the largest increase in 5 months.

Japan Jun retail sales fell -4.1% m/m, weaker than expectations of -1.6% m/m and the steepest pace of decline in 6 years.

Japan Jul Tokyo CPI rose +2.0% y/y, stronger than expectations of +1.8% y/y.  Jul Tokyo CPI ex-fresh food and energy rose +2.0% y/y, right on expectations. 

As expected, the BOJ kept its target interest rate unchanged at 1.00% in an 8-1 vote and said CPI risks are skewed to the upside.

The BOJ raised its 2026 GDP forecast to 0.6% from 0.5% and lowered its 2026 core CPI ex-energy forecast to 2.5% from 2.6%. 

BOJ Governor Ueda said the BOJ could speed up the pace of its interest rate increases if it determined that financial conditions had become too easy, and upside price surprises become more costly as the inflation trend nears the 2% target.  He added that the yen impact on prices is bigger than before.

August COMEX gold (GCQ26) on Friday closed down -51.00 (-1.24%), and September COMEX silver (SIU26) closed down -1.231 (-2.09%).

Gold and silver prices settled sharply lower on Friday amid a stronger dollar.  Also, higher global bond yields on Friday weighed on metals prices. In addition, Friday’s +1% increase in crude oil prices boosts inflation expectations that could prompt the world’s central banks to tighten their monetary policies, a bearish factor for precious metals.  Losses in precious metals accelerated on Friday after Dallas Fed President Lorie Logan said she favors tighter Fed policy to bring inflation down.

Friday’s action by the BOJ to keep interest rates steady is supportive of precious metals.  Geopolitical tensions also support safe-haven demand for precious metals amid ongoing hostilities in the Middle East.

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.