Dollar Rallies on Solid US Economic News and Soaring Crude Prices

The dollar index (DXY00) rose by +0.26% on Thursday.  The dollar rallied on Thursday amid 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.  Gains in the dollar accelerated on Thursday after WTI crude oil prices rose more than +2%, raising inflation expectations and a hawkish factor for Fed policy. 

The dollar also found support from Thursday’s Financial Times report 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 by +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 on Thursday and finished down by -0.26%.  The euro was under pressure on Thursday from a stronger dollar.  Also, the unexpected decline in Eurozone June retail sales was negative for the euro.  In addition, Thursday’s +2% 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 87% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.39% on Thursday.  The yen retreated on Thursday amid a +2% 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 on Thursday were negative for the yen. 

Losses in the yen were limited on Thursday amid 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 61% 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) closed down -5.30 (-0.12%) on Thursday, and September COMEX silver (SIU26) closed down -0.682 (-1.09%).

Gold and silver prices gave up an early advance on Thursday and settled lower, with gold falling from a 7-week high and silver dropping from a 1-month high.  Precious metals were pressured on Thursday by a stronger dollar. Also, Thursday’s +2% jump in WTI crude oil raised inflation expectations, potentially persuading global central banks to tighten their monetary policies, a bearish factor for precious metals.  In addition, Thursday’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. 

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.