Dollar Falls on Weak U.S. Economic Data and Strength in Euro

The dollar index (DXY00) on Monday fell by -0.24% but remained above last Friday’s 2-1/2 week low.  Weaker-than-expected U.S. economic data Monday weighed on the dollar.  Also, strength in the euro Monday weighed on the dollar after ECB Governing Council member Kazaks said that stronger rate hikes from the ECB may not be over.

Monday’s U.S. economic data was weaker than expected and bearish for the dollar.   The U.S. June Chicago Fed national activity index was unchanged at a 16-month low of -0.19, weaker than expectations of 0.00.  Also, the July Dallas Fed outlook for manufacturing activity index fell -4.9 to a 2-year low of -22.6, weaker than expectations of -18.5.

EUR/USD (^EURUSD) on Monday rose by +0.104% after recovering from early losses.  The euro found support Monday on hawkish comments from ECB Governing Council member Kazaks who said the expected September interest rate increase by the ECB should be "quite significant."   Kazaks also said, “a too weak euro is a problem."

EUR/USD Monday initially moved lower after a gauge of German investor confidence fell to a 2-year low. Also, concern about an energy crisis in Europe weighed on the euro after Russia’s Gazprom PJSC said it will reduce gas flows to Europe through the Nord Stream pipeline to 20% of capacity starting Wednesday from 40% Monday.

ECB Governing Council member Kazaks said the ECB's 50 bp rate hike last week was not just front loading and that the expected September interest rate increase should be "quite significant" as well.  He added, "we do not target the exchange rate, but the exchange rate is an important element driving inflation.  A too weak euro is a problem."

Monday’s Eurozone economic data was negative for EUR/USD after the German July IFO business climate index fell -3.6 to a 2-year low of 88.6, weaker than expectations of 90.1.

USD/JPY (^USDJPY) on Monday rose by +0.39%.  The yen was under pressure Monday from higher T-note yields. The yen was also under pressure after Cabinet Office cut its 2022 Japan GDP estimate.  In addition, Monday’s slump in the 10-year JGB bond yield to a 4-1/2 month low of 0.177% weakened the yen’s interest rate differentials and pressured the yen. 

Japan's Cabinet Office on Monday cut its Japan 2022 GDP forecast to 2.0% from a January estimate of 3.2%, saying private consumption was likely to be weaker than previously forecast due to the resurgence of Covid cases and rising prices due to the war in Ukraine.

August gold (GCQ22) Monday fell by -8.30 (-0.48%), and September silver (SIU22) fell by -0.289 (-1.55%).  Precious metals on Monday posted moderate losses.  Expectations for the Fed to raise interest rates by +75 bp at the Tue/Wed FOMC meeting weighed on metals prices.  Gold was also under pressure Monday from higher T-note yields. Ongoing fund liquidation of long gold positions continues to bearish for gold prices as long gold positions in ETFs have dropped for 18 consecutive days to a 4-1/2 month low last Friday.  A weaker dollar Monday limited losses in metals. 

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.  Close to 30 million people are under some form of movement restrictions in China as the government maintains its strict Covid-Zero strategy.

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