Dollar Slips on Weaker-Than-Expected US Economic News

The dollar index (DXY00) is down by -0.04% today.  The dollar gave up an early advance today and turned lower on weaker-than-expected US economic news, including July new home sales and Aug consumer confidence.  Also, WTI crude oil plunged -3% to a 1-week low today, lowering inflation expectations and a dovish factor for Fed policy.  In addition, safe-haven demand for the dollar was reduced today after the New York Times reported the US State Department is preparing to send US diplomats back to embassies in the Middle East that were evacuated before and during the war with Iran, suggesting that the Trump administration does not anticipate a return to all-out hostilities with Iran.

The US June S&P Composite-20 Home Price Index rose +2.1% y/y, stronger than expectations of +1.8% y/y and the largest year-over-year increase in a year.

US July new home sales fell -10.5% m/m to a 6-month low of 607,000, weaker than expectations of 620,000.

The US July Richmond Fed manufacturing survey of current conditions unexpectedly fell -1 to 4, weaker than expectations of an increase to 7.

The Conference Board US Aug consumer confidence index fell -0.8 to a 7-month low of 89.4, weaker than expectations of 90.2.

The markets are discounting a 40% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) is up by +0.07% today.  The euro is moving higher today amid weakness in the dollar. Also, better-than-expected Eurozone economic news boosted the euro today after German Q2 GDP was revised upward and the Aug IFO business climate survey rose more than expected to a 1-year high. Also, today’s -3% plunge in crude oil prices to a 1-week low supports the Eurozone economy and the euro, as Europe imports most of its energy. 

German Q2 GDP was revised upward to +0.3% q/q and +1.0% y/y from the previously reported +0.2% q/q and +0.9% y/y.

The German Aug IFO business climate survey rose +2.1 to a 1-year high of 88.8, stronger than expectations of 87.2.

The markets are discounting a 94% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is up by +0.11% today.  The yen is under pressure today 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 are limited, as today’s -3% fall in crude oil prices to a 1-week low is positive for Japan’s economy and the yen, as Japan imports more than 90% of its energy. Also, lower T-note yields today support 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 82% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 

The Japan June leading index CI was revised upward by +0.1 to 116.5 from the previously reported 116.4.

October COMEX gold (GCV26) is down -17.90 (-0.38%) today, and September COMEX silver (SIU26) is down -0.779 (-1.14%).

Precious metals prices are moving lower today, as strength in stocks has curbed safe-haven demand for precious metals.  Also, today’s report from the New York Times that said the US State Department is preparing to send US diplomats back to embassies in the Middle East suggests the US does not anticipate ramping up hostilities against Iran, thus easing geopolitical concerns and reducing safe-haven demand for precious metals.

Losses in precious metals are limited as today’s -3% plunge in crude oil prices 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. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 3.25-month high today.  Long holdings in silver ETFs also rose to a 4.75-month high today.

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.