Dollar Falls on Lower T-Note Yields and Strength in Stocks

The dollar index (DXY00) on Thursday fell by -0.17% on weakness in T-note yields. Also, a rally in the S&P 500 to a 6-week high reduced the liquidity demand for the dollar.  In addition, weaker-than-expected U.S. economic data Thursday weighed on the dollar after weekly jobless claims unexpectedly rose to an 8-month high, and the July Philadelphia Fed business outlook survey unexpectedly fell to a 2-year low.  Finally, strength in EUR/USD undercut the dollar after the euro rose to a 2-week high Thursday when the ECB raised interest rates more than expected.

Thursday’s U.S. economic data was weaker than expected and bearish for the dollar.  Weekly initial unemployment claims unexpectedly rose +7,000 to an 8-month high of 251,000, showing a weaker labor market than expectations of a decline to 240,000.  Also, the July Philadelphia Fed business outlook survey unexpectedly fell -9.0 to -12.3, weaker than expectations of an increase to 0.8 and the steepest pace of contraction in 2 years.  In addition, June leading indicators fell -0.8% m/m, weaker than expectations of -0.6% m/m and the biggest decline in 2 years.

EUR/USD (^EURUSD) on Thursday rose by +0.14%.  The euro Thursday rose to a 2-week high after the ECB raised interest rates by a more than expected 50 bp.  Also, expectations that the ECB will remain aggressive in tightening monetary policy are supportive for the euro after the ECB said "further normalization of interest rates will be appropriate" and that it will decide on further interest rate hikes "meeting-by-meeting.”

EUR/USD fell back from its best levels Thursday on political turmoil in Italy after Italian Prime Minister Draghi resigned.  Italian President Mattarella accepted the resignation Thursday and dissolved parliament. Italy will hold an early election on Sunday, September 25.

The ECB on Thursday raised its deposit facility rate by +50 bp to 0%, its first increase in 11 years and a bigger increase than expectations of a +25 bp hike.  The ECB also raised its main refinancing rate by +50 bp to 0.5%, more than expectations of a +25 bp rate increase.

The ECB Thursday also approved the launch of the Transmission Protection Instrument (TPI). The ECB will purchase public sector securities in maturities of 1 to 10 years to counter “unwarranted” market movements in Eurozone bond yields.  All Eurozone members are eligible for TPI, and the Governing Council alone will decide whether the TPI is used, taking into account “multiple indicators,” including compliance with European Union fiscal rules.

ECB President Lagarde said, “price pressures are spreading across more and more sectors.  We expect inflation to remain undesirably high for some time.”

USD/JPY (^USDJPY) on Thursday fell by -0.42%.  USD/JPY Thursday gave up an early advance and posted moderate losses as a decline in T-note yields boosted the yen.  The yen also garnered support from Thursday's Japanese trade data that showed Japan June exports rose +19.4% y/y, stronger than expectations of +17.0% y/y and the biggest increase in 7 months. 

USD/JPY Thursday initially moved higher as the yen weakened after the BOJ kept its monetary policy unchanged as expected and cut its 2022 Japan GDP estimate.  Also, dovish comments from BOJ Governor Kuroda undercut the yen when he said, "we have no intention at all of raising interest rates under the yield curve control framework.”

The BOJ, as expected Thursday, maintained its policy balance rate at -0.1% and kept its 10-year JGB yield target at about 0%.

The BOJ cut its Japan 2022 GDP forecast to 2.4% from a previous forecast of 2.9% and raised its 2022 core CPI forecast to 2.3% from a previous forecast of 1.9%.

August gold (GCQ22) Thursday rose by +13.20 (+0.78%), and September silver (SIU22) rose by +0.051 (+0.27%).  Precious metals Thursday recovered early losses and posted moderate gains.  Gold prices Thursday initially whipsawed down to a 1-1/4 year low after the ECB raised interest rates by a more than expected +50 bp.  However, a weaker dollar Thursday sparked short covering in metals, and prices closed higher.  Also, lower global bond yields Thursday were bullish for gold prices.  However, ongoing fund liquidation of long gold positions continues to weigh on gold prices as long gold positions in ETFs have dropped for 16 consecutive days to a 4-1/2 month low Wednesday. 

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 reported 935 new Covid infections on Tuesday, the most in 8 weeks.  Close to 30 million people are under some form of movement restrictions in China as the government maintains its strict Covid-Zero strategy.  Also, Japan reported a record 110,680 new Covid infections Saturday.  In addition, the 7-day average of new U.S. Covid infections rose to a 5-month high of 136,234 on Sunday. 

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