The dollar index (DXY00) tumbled to a 2.5-month low on Wednesday and finished down by -0.80%. The dollar retreated on Wednesday after the US Treasury boosted liquidity and announced plans to increase buybacks of long-dated bonds. Lower T-note yields on Wednesday also weakened the dollar‘s interest rate differentials.
The US Treasury announced on Wednesday that it will at least double the maximum size of its liquidity support buyback operations for longer-dated nominal coupon sizes to at least $4 billion per operation, effective September 9.
Wednesday’s minutes of the July 28-29 FOMC meeting were slightly hawkish and dollar supportive as many Fed officials indicated that policy tightening would be necessary if inflation didn't decline. The minutes showed participants' inflation outlooks were "highly uncertain," and re re-escalation of the Iran war "clouded the inflation outlook." Officials described the labor market as stable, with labor demand and supply in balance.
The markets are discounting a 32% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) rallied to a 2.5-month high on Wednesday and finished up by +0.84%. Wednesday’s slump in the dollar was bullish for the euro after the US Treasury announced that it was boosting liquidity by increasing its purchases of longer-dated US government bonds. Wednesday’s rally in crude oil prices to a 3-week high was bearish for the Eurozone economy and the euro, as Europe imports most of its energy.
The markets are discounting a 96% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) fell by -0.80% on Wednesday. The yen rallied to a 1-week high on Wednesday against the dollar after the US Treasury announced that it was boosting purchases of longer-dated US government bonds. The yen also found support after Wednesday’s economic news showed that Japanese June core machine orders rose more than expected. In addition, lower T-note yields on Wednesday supported the yen. On the negative side, Wednesday’s rally in WTI crude oil to a 3-week high is a bearish factor for Japan’s economy and the yen, as Japan imports more than 90% of its energy.
The yen has underlying support from increased expectations of a BOJ rate hike after Bloomberg reported last 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. Finally, 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 67% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 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) closed up +123.50 (+2.81%) on Wednesday, and September COMEX silver (SIU26) closed up +1.788 (+2.79%).
Precious metals prices rallied sharply on Wednesday, with gold soaring to a 2.5-month high. Wednesday’s slump in the dollar index to a 2.5-month low was bullish for precious metals. Also, Wednesday’s action by the US Treasury to boost its buybacks of longer-dated US government bonds increased demand for precious metals as a store of value. In addition, lower global bond yields on Wednesday supported precious metals. On the negative side, Wednesday’s rally in crude oil prices to 3-week highs boosted inflation expectations that 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. Long holdings in silver ETFs also 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 the Aug 7 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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