Dollar Rallies on Fed Comments and Weak Stocks

The dollar index (DXY00) on Tuesday rose by +0.547 (+0.53%).  The dollar Tuesday shook off early losses and moved higher on hawkish comments from New York Fed President Williams, who said he sees the Fed hiking to somewhat restrictive rates in 2023.  The dollar remained firm the rest of the day as stocks gave up early gains and fell sharply, which boosted the liquidity demand for the dollar. 

Fed comments Tuesday were bullish for the dollar.  New York Fed President Williams said the U.S. economy is strong, and a recession is not in his base case.   He added that the Fed has a path to bring inflation down, and he sees the Fed hiking to somewhat restrictive rates in 2023.  Also, San Francisco Fed President Daly played down the risk of a U.S. recession, saying, "I wouldn't be surprised, and it's actually in my forecast, that growth will slip below 2%, but it won't actually pivot into negative territory."

Tuesday’s U.S. economic data was mixed for the dollar.  On the positive side, the Apr S&P CoreLogic composite-20 home price index unexpected rose at a record +21.23% y/y pace, stronger than expectations of a decline to +21.05% y/y.  However, on the bearish side, the Conference Board U.S. Jun consumer confidence index fell -4.5 points to a 16-month low of 98.7, weaker than expectations of 100.0. Also, the Jun Richmond Fed manufacturing survey unexpectedly fell -10 to a 2-year low of -19, weaker than expectations of an increase to -7.

EUR/USD (^EURUSD) on Tuesday fell by -0.0061 (-0.58%).  EUR/USD retreated Tuesday on concerns about the Eurozone economy after Italian Prime Minister Draghi warned that the Eurozone needs a contingency plan if Russia shuts off natural gas flows to Europe. Also, Tuesday’s weaker-than-expected consumer sentiment data for France and Germany weighed on EUR/USD. 

German Jul GfK consumer confidence fell -1.2 to a record low -27.4 (data from 2005), weaker than expectations of -27.3.

The France Jun consumer confidence indicator fell -3 to a 9-year low of 82, weaker than expectations of 84.

ECB President Lagarde said we would allow interest rates to rise "as far as necessary," complementing efforts to stabilize inflation at the 2% target.

ECB Governing Council member Kazaks said, "if we see that the situation has worsened, that inflation is high, and we see negative news in terms of inflation expectations, then in my view, front-loading interest rate hikes would be a reasonable choice."

USD/JPY (^USDJPY) on Tuesday rose by +0.79 (+0.58%).  USD/JPY Tuesday rose moderately and remains just below last Wednesday’s 23-year high.  Higher T-note yields Tuesday undercut the yen.  Central bank divergence continues to weigh on the yen with the Fed and ECB ending their QE programs and raising interest rates while the BOJ expands its QE program and maintains record low interest rates.

August gold (GCQ22) Tuesday closed down -3.6 (-0.20%), and July silver closed down -0.363 (-1.71%).  Gold and silver on Tuesday posted moderate losses. Dollar strength today is weighing on metals prices.  Also, higher global bond yields undercut gold prices.  Precious metals fell to their lows Tuesday on hawkish comments from New York Fed President Williams, who said the Fed has a path to bring inflation down, and he sees the Fed hiking to somewhat restrictive rates in 2023.

The dollar and gold have continued safe-haven support from the negative impact of the worldwide spread of the omicron Covid variant on the global economic recovery.  China has been slowly dropping Covid lockdowns, but elevated Covid cases may keep the country from fully reopening.  China reported no new Covid infections in Beijing and Shanghai on Monday for the first time in 4 months.  However, the 7-day average of new U.S. Covid infections rose to a 3-week high of 113,593 on Monday.

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