Dollar Gains on Favorable US Economic News

The dollar index (DXY00) is up by +0.17% today.  The dollar is moving higher today on some favorable US economic news.  Weekly jobless claims rose less than expected, Q2 nonfarm productivity rose more than expected, and Q2 unit labor costs rose less than expected.  The dollar also has support from today’s +1% increase in WTI crude oil prices, which raises inflation expectations and is hawkish for Fed policy. 

The dollar also has support from a Financial Times report today that said Fed Chair Warsh is willing to raise interest rates at the September FOMC meeting if inflation firms and market expectations shift further towards tightening in the coming months.

US weekly initial unemployment claims rose +1,000 to 199,000, showing a stronger labor market than expectations of 205,000.

US Q2 nonfarm productivity rose +1.4%, stronger than expectations of +0.6%.  Q2 unit labor costs rose +1.3%, less than expectations of +2.1%.

The markets are discounting a 58% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell from a 7-week high today and is down by -0.16%.  The euro is under pressure today from a stronger dollar.  Also, the unexpected decline in Eurozone June retail sales is negative for the euro.  In addition, today’s +1% increase in crude oil prices is bearish for the Eurozone economy and the euro as Europe imports most of its energy.  Losses in the euro are limited after German June factory orders rose more than expected.

Eurozone June retail sales unexpectedly fell -0.3% m/m, weaker than expectations of a +0.1% m/m increase

German June factory orders rose +3.1% m/m, stronger than expectations of +0.5% m/m.

The markets are discounting an 84% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is up by +0.30% today.  The yen is sliding today amid a +1% increase in crude oil prices, which is bearish for Japan’s economy and the yen as Japan imports more than 90% of its energy.  Also, higher T-note yields today are negative for the yen.  Losses in the yen are limited on signs the US would continue joint intervention in the forex market in support of the yen when Treasury Secretary Bessent said the US "will not hesitate" to repeat action in the forex market to support the yen if needed. 

The yen continues to suffer from weak interest rate differentials, with markets discounting a 63% 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 up +16.10 (+0.38%), and September COMEX silver (SIU26) is down -0.563 (-0.90%).

Gold and silver prices are mixed today, with gold climbing to a 7-week high.  Precious metals have support on the improved prospects for the reopening of the Strait of Hormuz after Iran and Oman said they have agreed in principle on a plan to reopen the Strait of Hormuz.  The reopening of the strait would boost global oil supplies and pressure oil prices, thus easing inflation expectations and reducing the chances of tighter monetary policies by the world’s central banks. 

The dollar’s strength today is bearish for metals prices.  Also, today’s report from the Financial Times weighed on precious metals prices as the report said Fed Chair Warsh is willing to raise interest rates at next month’s FOMC meeting if inflation continues to run hot.  Today’s +1% jump in crude oil prices also raises inflation expectations and could persuade the world’s central banks to tighten their monetary policies, a bearish factor for precious metals.

Silver prices also have carryover support from today’s rally in copper prices to a new all-time high. Copper prices are soaring as LME copper inventories dropped to a 5-month low on an increase in US copper imports. More than 200,000 MT of copper arrived at US ports in July, the largest monthly volume in data going back to 2014, as US importers hoard copper ahead of President Trump’s decision on tariffs on refined copper imports.  The influx of US copper imports has tightened supplies of copper to the rest of the world. 

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.