Dollar Posts Modest Gains as Crude Oil Fluctuates

The dollar index (DXY00) is up by +0.05% today.  The dollar found support today after WTI crude oil prices rose more than +2% to a 1-week high, which raises inflation expectations and may persuade the Fed to tighten monetary policy, a supportive factor for the dollar.  However, the dollar fell back from its best level as crude prices erased most of their overnight gains when Pakistan signaled the US and Iran were close to an arrangement that could reopen the Strait of Hormuz.   

US July existing home sales fell -1.7% m/m to 4.06 million, close to expectations of 4.05 million.

The risk of a renewed flare-up across the Middle East remains high, which is providing safe-haven demand for the dollar. Another UAE tanker was targeted by an Iranian missile on Saturday while transiting the Strait of Hormuz.  Also, on Sunday, Houthi militants in Yemen claimed an attack on Saudi Arabia's Jazan refinery.

The markets are discounting a 48% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) is down by -0.02% today.  The euro is slightly lower today amid strength in the dollar.   Also, today’s rally in crude oil prices to a 1-week high is bearish for the Eurozone economy and the euro, as Europe imports most of its energy.  The euro recovered from its worst level as crude oil gave up most of its overnight advance after Pakistan signaled optimism that the US and Iran appeared close to some sort of arrangement over the Strait of Hormuz. 

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) is down by -0.03% today.  The yen rebounded from a 1-week low against the dollar today and moved slightly higher after crude oil prices gave up most of an overnight 2% advance.  The yen also recovered today after T-notes gave up overnight gains and turned lower, a positive factor for the yen.  Trading activity in the yen may be below normal with markets in Japan closed today for the Mountain Day holiday.

The yen has near-term support amid signs the US would continue joint intervention in the forex market in support of the yen.  Kyodo reported on Monday that BOJ Governor Kazuo Ueda's strong signal for a BOJ interest rate increase next month was the decisive factor behind the recent coordinated intervention in the yen by Japan and the US.  

The yen continues to suffer from weak interest rate differentials, with markets discounting a 64% 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) is up +25.80 (+0.59%) today, and September COMEX silver (SIU26) is down -0.312 (-0.48%).

Gold and silver prices are mixed today, with gold climbing to a 2.25-month high.  Gold prices are climbing today in speculation that Wednesday’s US July CPI report will show July core CPI easing to 2.5% y/y from 2.6% y/y, a dovish factor for Fed policy and bullish for precious metals.  Also, precious metals have carryover support from last Friday when the US July payroll report showed an unexpected decline in nonfarm payrolls and a smaller-than-expected increase in average hourly earnings, which could potentially persuade the Fed to ease monetary policy, a bullish factor for precious metals.  Gold prices also have support after China’s central bank, the PBOC, added gold to its reserves last month by +640,000 ounces, the largest increase in more than 2.5-years. 

Today’s stronger dollar is bearish for metals prices.  Also, today’s rally in crude oil prices to a 1-week high raises inflation expectations, which may persuade the world’s central banks to tighten their monetary policies, a bearish factor for precious metals. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10.25-month low on July 27, 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 last Friday’s news that bullion held in China’s PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first consecutive month the PBOC boosted its gold reserves.