Dollar Recovers on Strong ISM Manufacturing Index

The dollar index (DXY00) fell to a 7-week low on Monday and finished down by -0.02%.  The dollar moved lower on Monday as easing geopolitical tensions in the Middle East boosted stocks and reduced safe-haven demand for the dollar.  Also, Monday's -5% fall in WTI crude oil prices lowered inflation expectations and could prompt the Fed to loosen monetary policy, a negative factor for the dollar. 

The dollar recovered nearly all of its losses on Monday on signs of US economic strength after the July ISM manufacturing index rose more than expected to a 4-year high. 

Dovish comments on Monday from New York Fed President John Williams were negative for the dollar, as he said interest rates remain well positioned and 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 67% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell by -0.12% on Monday.  The euro fell from a 1.5-month high and moved lower on Monday after the dollar recovered from early losses on the stronger-than-expected July ISM manufacturing index.  Also, weaker-than-expected Eurozone economic news weighed on the euro 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 on Monday amid early dollar weakness and the -5% 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 88% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) fell by -0.35% on Monday.  The yen rallied to a 2.75-month high against the dollar on Monday after the US and Japan warned of further coordinated intervention in currency markets in support of the yen.  Also, lower T-note yields on Monday are bullish for the yen.  In addition, Monday's -5% 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.

Japan's 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 50% 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) on Monday closed down -16.30 (-0.40%), and September COMEX silver (SIU26) closed up +0.070 (+0.12%).

Gold and silver prices settled mixed on Monday.  Gold gave up overnight gains and turned lower on Monday as stocks rallied sharply after Middle East tensions eased, which curbed safe-haven demand for gold.  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 found support on Monday from the sharp -5% decline in crude oil prices that reduced inflation expectations and could prompt the world's central banks to loosen their monetary policies, a bullish factor for precious metals.  Also, lower T-note yields on Monday are bullish for precious metals. 

Silver prices recovered from a 1.5-week low and turned higher due to Monday's stronger-than-expected US July ISM manufacturing index, which expanded by the most in 4 years and is bullish for industrial metals demand.

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.