Dollar Moves Higher as US Ramps Up Pressure on Iran

The dollar index (DXY00) rose by +0.22% on Monday.  The dollar gained on Monday on safe-haven demand after US Treasury Secretary Bessent unveiled US plans to isolate Iran’s economy. The weakness in stocks on Monday also boosted liquidity demand for the dollar. 

Gains in the dollar were limited by Monday’s report from CNBC that said the Treasury could use the Treasury General Account, which had a balance of $935 billion on August 20, to fund expanded buybacks of higher-yielding, older government securities.  Also, Monday’s decline in WTI crude oil by more than -2% lowered inflation expectations and is dovish for Fed policy. 

The US July Chicago Fed national activity index fell -0.14 to -0.08, slightly stronger than expectations of -0.09.

US Treasury Secretary Scott Bessent’s comments on Monday were supportive of the dollar after he announced the US will begin a campaign to sever Iran from the global economy, warning that any country doing business with Iran risks facing US sanctions.  He said the US is focusing on five of Iran's "most vital lifelines," including digital assets, technology, gold, aviation, and shipping, and that countries will have a defined timeline to shut down economic cooperation with Iran; if they don't, the Treasury will act unilaterally.  Iran's secretary of the Supreme National Security Council responded by saying, "Iran will regard any country's participation in or support for America's economic war against the Iranian people as an act of war, and not a single drop of oil will be exported, neither through the Strait of Hormuz nor from anywhere in the Persian Gulf."

The markets are discounting a 43% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell by -0.14% on Monday.  Dollar strength weighed on the euro on Monday.  Also, comments on Monday from ECB Executive Board member Piero Cipollone undercut the euro when he said raising interest rates to stabilize inflation could dampen economic growth.  Euro losses were limited amid Monday’s -2% decline in crude oil prices, which supports the Eurozone economy and the euro, as Europe imports most of its energy. 

ECB Executive Board member Piero Cipollone said, "In the event of a supply-side shock, such as the oil shock, hiking interest rates so as to stabilize inflation around the target could dampen economic growth that is already affected by a negative shock."

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 +0.13% on Monday.  The yen moved lower against the dollar on Monday and 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%.

Losses in the yen were limited, as Monday’s -2% decline in crude oil prices is positive for Japan’s economy and the yen, as Japan imports more than 90% of its energy.  Also, lower T-note yields on Monday supported the yen.

The yen has underlying support from increased expectations of 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 80% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 

October COMEX gold (GCV26) closed up +16.30 (+0.35%) on Monday, and September COMEX silver (SIU26) closed down -0.936 (-1.35%).

Precious metals prices settled mixed on Monday, with gold climbing to a 3.5-month high.  Precious metals have support from Monday’s -2% fall in crude oil prices, which lowers inflation expectations that could persuade the world’s central banks to loosen monetary policy, a bullish factor for precious metals. Also, Monday’s report from CNBC is bullish for precious metals, as the report said the Treasury could use the Treasury General Account to fund expanded buybacks of longer-dated US government bonds, bolstering concerns over dollar debasement and increasing demand for precious metals as a store of value.  Monday’s dollar strength limited gains in gold and weighed on silver prices.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 3-month high on Monday.  Long holdings in silver ETFs also rose to a 4-month high last Wednesday.

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.