The dollar index (DXY00) on Thursday ended the day little changed despite downward pressure from the dovish US PPI report, which lowered the odds of a Fed rate hike in September to 35% from 40% on Wednesday. In addition, the 10-year T-note yield fell -5 bp, undercutting the dollar's interest rate differentials.
The dollar was also 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 is no sign 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.
Thursday'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%.
Thursday's PPI report followed Wednesday's favorable July US CPI report, in which the July core CPI fell to a 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) rose slightly by +0.03%. The euro's interest rate differentials improved amid a -5 bp decline in the US 10-year T-note yield and as expectations for a Fed rate hike dipped to 35%, well below the 90% chance of an ECB rate hike.
The markets are discounting a 90% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) rose +0.07%. The yen had underlying support from increased expectations of a BOJ rate hike after Bloomberg reported Thursday that Japanese Prime Minister Sanae Takaichi's government supports a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. The yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak.
The markets are discounting a 73% 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 range of 3.50%-3.75%.
October COMEX gold (GCV26) on Thursday fell -47.0 (-1.06%), and September COMEX silver (SIU26) fell -0.707 (-1.08%).
Precious metals prices weakened amid reduced safe-haven demand, driven by the lack of 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 had underlying support from Thursday's dovish PPI report, reduced expectations for a Fed rate hike, and a -5 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.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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