Dollar Recovers Early Losses on US Economic Strength

The dollar index (DXY00) recovered from a 3-month low on Thursday and finished up +0.08%.  Short covering emerged in the dollar on Thursday amid better-than-expected US economic news, including weekly jobless claims, the Aug Philadelphia Fed business outlook survey, and July leading indicators.  Also, Thursday’s +2% jump in WTI crude oil to a 1-month high boosted inflation expectations that may persuade the Fed to tighten monetary policy, a supportive factor for the dollar.

The dollar initially extended Wednesday’s sharp losses on Thursday, driven by negative carryover from Wednesday, when the US Treasury boosted liquidity and announced plans to increase buybacks of long-dated bonds.  Also, dovish comments on Thursday from San Francisco Fed President Mary Daly weighed on the dollar when she said she's "not seeing evidence" of a need for preemptive Fed rate hikes.

US weekly initial unemployment claims unexpectedly fell -6,000 to 206,000, showing a stronger labor market than expectations of an increase to 210,000.

The US Aug Philadelphia Fed business outlook survey unexpectedly rose +6.0 to a 5.25-year high of 47.4, stronger than expectations of a decline to 24.8.

US July leading indicators rose +0.2% m/m, stronger than expectations of +0.1% m/m.

San Francisco Fed President Mary Daly said the US Treasury market is signaling that monetary policy is in a good place right now, and she's "not seeing evidence" of a need for preemptive Fed rate hikes.

St. Louis Fed President Alberto Musalem said he would have preferred to raise interest rates at the July FOMC meeting in order to bring down still-high inflation.

The markets are discounting a 35% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell from a 3-month high today and finished down by -0.03%.  Thursday’s rebound in the dollar sparked long liquidation in the euro.  Also, Thursday’s rally in crude oil prices to a 1-month high is bearish for the Eurozone economy and the euro, as Europe imports most of its energy.

The euro initially garnered support on Thursday from the stronger-than-expected report on German July producer prices, a hawkish factor for ECB policy.  Also, higher European government bond yields strengthened the euro’s interest rate differentials after the 10-year German Bund yield rose to a 15-year high Thursday of 3.276%. 

The markets are discounting a 95% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.63% on Thursday.  The yen was under pressure on Thursday from rising crude oil prices.  Thursday’s +2% jump in crude oil to a 1-month high is bearish for Japan’s economy and the yen, as Japan imports more than 90% of its energy.  Also, rising T-note yields on Thursday were negative for the yen. 

Thursday's better-than-expected Japanese trade news was bullish for the yen.  Japan's July exports rose +23.2% y/y, stronger than expectations of +20.1% y/y and the largest increase in 3.75 years.  Also, July imports rose +27.8% y/y, stronger than expectations of +25.1% y/y and the largest increase in 3.5 years.

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 an 81% 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 +25.80 (+0.57%) on Thursday, and September COMEX silver (SIU26) closed up +2.280 (+3.46%).

Precious metals prices extended this week’s rally on Thursday, with gold posting a 2.5-month high and silver posting a 2-month high.  Precious metals have carryover support from Wednesday, when the US Treasury boosted its buybacks of longer-dated US government bonds, increasing demand for precious metals as a store of value.  Also, dovish comments on Thursday from San Francisco Fed President Mary Daly were bullish for precious metals when she said she's "not seeing evidence" of a need for preemptive Fed rate hikes.

Gains in gold prices were limited on Thursday after the dollar index recovered from a 3-month low and turned higher.  Also, crude oil prices jumped more than +2% to a 1-month high on Thursday, boosting inflation expectations and potentially persuading the world’s central banks to tighten monetary policy, 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.