Dollar Finishes Slightly Higher Ahead of Fed Chair Warsh

The dollar index (DXY00) rose to a 1-week high on Thursday and finished up by +0.03%.  The dollar found some support on Thursday after weekly US jobless claims unexpectedly declined, signaling strength in the labor market.  Also, hawkish comments on Thursday from Kansas City Fed President Jeff Schmid and Cleveland Fed President Beth Hammack supported the dollar when they said current Fed policy isn’t in restrictive territory.  However, the dollar gave up nearly all of its gains as stocks rallied, which curbed liquidity demand for the dollar.

US weekly initial unemployment claims unexpectedly fell -4,000 to 203,000, showing a stronger labor market than expectations of an increase to 208,000.

Kansas City Fed President Jeff Schmid said current Fed policy is not restraining the economy at a time when inflation continues to run above its 2% target.  He added that the interest rate setting "might be accommodative on the short end" and that "we've got work to do."

Cleveland Fed President Beth Hammack said now is the time to act to contain inflation, and "I think it's appropriate for the Fed to put some restraint there to help bring inflation back down to target."

The markets are discounting a 33% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell to a 1-week low on Thursday and finished down by -0.02%.  The dollar’s strength on Thursday weighed on the euro.  Also, concerns about an escalation of the Russia-Ukraine war are bearish for the euro after Bloomberg reported that Russia is preparing to escalate attacks on Ukraine after concluding that negotiations for a peace deal have reached a dead end. 

Limiting losses in the euro on Thursday was the stronger-than-expected increase in the German Sep GfK consumer confidence index to a 6-month high.  Also, the euro has positive carryover from Wednesday, when ECB Executive Board member Isabel Schnabel said that, with inflation above the ECB’s 2% target, further ECB tightening will be necessary.

Eurozone July M3 money supply rose +3.4% y/y, weaker than expectations of +3.5% y/y. 

The German Sep GfK consumer confidence index rose +2.8 to a 6-month high of -26.6, stronger than expectations of -29.5.

The markets are discounting a 97% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.06% on Thursday.  The yen fell to a 1-week low against the dollar on Thursday amid dollar strength and higher T-note yields.  The yen also 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%.

The yen found some support on Thursday on comments from BOJ Deputy Governor Ryozo Himino, who said, "We should pay greater attention to the upside risk to prices than in the past. Raising interest rates in a timely manner will help avoid inflation acceleration and abrupt rate hikes in the future and may ultimately be in the best interests of small and midsize businesses, mortgage borrowers, and public finances."

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. 

October COMEX gold (GCV26) closed up +10.30 (+0.22%) on Thursday, and September COMEX silver (SIU26) closed up +1.405 (+2.07%).

Precious metals prices settled higher on Thursday.  Short covering emerged in precious metals to boost prices on Thursday ahead of Friday’s speech from Fed Chair Warsh at the Fed’s annual symposium in Jackson Hole, Wyoming.  Precious metals could rally on Friday if Fed Chair Warsh strikes a dovish tone.

Gains in metals prices were limited on Thursday after the dollar index rallied to a 1-week high.  Also, strength in stocks on Thursday reduced safe-haven demand for precious metals.  In addition, hawkish comments on Thursday from Kansas City Fed President Jeff Schmid and Cleveland Fed President Beth Hammack undercut precious metals, saying current Fed policy is not restraining the economy while inflation continues to run above its 2% target. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-month high on Wednesday.  Long holdings in silver ETFs also rose to a 4.75-month high on Tuesday.

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.