Dollar Pressured by Strong Stocks and Easing Geopolitical Risks

The dollar index (DXY00) fell to a 7-week low today and is down by -0.10%.  Easing geopolitical tensions in the Middle East are boosting stocks and reducing safe-haven demand for the dollar.  Also, today's -6% plunge in WTI crude oil prices lowers inflation expectations and could prompt the Fed to loosen monetary policy, a negative factor for the dollar.  The dollar recovered from its worst level after the July ISM manufacturing index rose more than expected to a 4-year high. 

Dovish comments today from New York Fed President John Williams were negative for the dollar when he said interest rates remain well positioned as inflation should ease during the second half of the year.

The US July ISM manufacturing index rose +2.3 to 55.6, stronger than expectations of 53.9 and the fastest pace of expansion in four years.

US June construction spending unexpectedly fell -0.1% m/m, weaker than expectations of a +0.2% m/m increase.

The markets are discounting a 63% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) is down by -0.07% today.  The euro fell from a 1.5-month high and is slightly lower after the Eurozone July S&P manufacturing PMI was revised downward and after German June retail fell more than expected, the most in 13 months. 

The euro initially moved higher today on dollar weakness and the -6% plunge in crude oil prices, which is supportive of the Eurozone economy and the euro as Europe imports most of its energy. 

The Eurozone July S&P manufacturing PMI was revised downward by -0.1 to 51.9 from the originally reported 52.0. 

German June retail sales fell -1.1% m/m, weaker than expectations of -0.3% m/m and the biggest decline in 13 months.

The markets are discounting an 87% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is down by -0.55% today.  The yen rallied to a 2.75-month high against the dollar today after the US and Japan warned of further coordinated intervention in currency markets in support of the yen.  Also, lower T-note yields today are bullish for the yen.  In addition, today's -6% slump in crude oil prices is bullish for Japan's economy and the yen as Japan imports more than 90% of its energy. 

Japan's Ministry of Finance said it conducted a yen-buying operation on July 31 in coordination with the US Treasury and wouldn't hesitate to conduct further intervention to support the yen.

The Japan July S&P manufacturing PMI was revised downward by -0.2 to 54.5 from the previously reported 54.7.

The yen continues to suffer from weak interest rate differentials, with markets discounting only a 49% 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%.

October COMEX gold (GCV26) today is down -18.90 (-0.46%), and September COMEX silver (SIU26) is down -0.416 (-0.72%).

Gold and silver prices gave up overnight gains and turned lower today as stocks rallied after Middle East tensions eased, which curbs safe-haven demand for precious metals.  Geopolitical tensions eased after President Trump called off a planned attack on Iran and Iran suggested negotiations to get more ships moving through the Strait of Hormuz were making progress.

Precious metals initially opened higher today as the sharp -6% fall in crude oil prices reduced inflation expectations that could prompt the world's central banks to loosen their monetary policies, a bullish factor for precious metals.  Also, a weaker dollar and lower T-note yields today are bullish for precious metals.

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.