Dollar is Undercut by Dovish US PPI Report

The dollar index (DXY00) today is down -0.09 (-0.09%) on the dovish US PPI report, which caused the odds for a Fed rate hike in September to drop to 35% from 40% on Wednesday.  In addition, the 10-year T-note yield is down -7 bp, undercutting the dollar's interest rate differentials. 

The dollar is also being undercut by reduced safe-haven demand as there were no overnight reports of new military attacks by the US or Iran in the Persian Gulf.  Market concerns about the Middle East were also reduced slightly by news reports saying that the Trump administration is pivoting to using the naval blockade to apply economic pressure on Iran rather than new military attacks. There are no reports of any progress between the US and Iran on an agreement to reopen the Strait of Hormuz, although some ships are still getting through by turning off their transponders and hoping for the best.

Today's US PPI report was favorable.  The July US final-demand PPI report of unchanged m/m and +4.7% y/y was weaker than market expectations of +0.2% m/m and +4.9% y/y.  The July core PPI report of +0.2% m/m was weaker than market expectations of +0.3%, although the year-on-year figure of +4.2% y/y was slightly stronger than market expectations of +4.1% y/y.  The July PPI of +4.7% y/y was down from May's 3.5-year peak of +5.9% y/y but was still far above the Fed's inflation target of +2%.

Today's PPI report followed yesterday's favorable July US CPI report, when the July core CPI fell to match the 5.5-year low of +2.5% y/y originally posted earlier this year.  Meanwhile, the nominal CPI fell to +3.4% from June's +3.5% but remained well above the 5.5-year low of +2.3% posted last year.

The markets are discounting a 35% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16, down from 40% on Wednesday and 51% on Tuesday.

EUR/USD (^EURUSD) is up +0.14% on dollar weakness.  Also, the euro's interest rate differentials saw a boost with today's -7 bp decline in the US 10-year T-note yield and with expectations for a Fed rate hike dipping to 35%, much lower than the chances for an ECB rate hike of 88%.

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 -0.18% due to dollar weakness. In addition, the yen received a boost from increased expectations for a BOJ rate hike after Bloomberg reported today that Japanese Prime Minister Sanae Takaichi's government supports a BOJ rate hike, coming in either September or October.  The government favors a rate hike to support the yen and prevent inflation pressures caused by the weak yen.  The yen has ongoing support from the recent coordinated US-Japan intervention in support of the yen and fears that further intervention might be forthcoming if the yen remains weak.

The markets are discounting a 76% chance of a +25 bp BOJ rate hike at the September 18 policy meeting, up from 63% on Wednesday.  The yen continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00% well below the Fed's federal funds rate target of 3.50%-3.75%.

October COMEX gold (GCV26) today is down -24.5 (-0.55%), and September COMEX silver (SIU26) is down -0.450 (-0.68%).

Precious metals prices are seeing weakness today on reduced safe-haven demand due to the lack of any overnight military strikes in the Persian Gulf and news reports indicating that the Trump administration is pivoting to economic pressure on Iran rather than new military strikes.

Precious metals prices have underlying support from today's dovish PPI report, along with reduced expectations for Fed rate hikes and the -7 bp decline in the 10-year T-note yield.

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.