Dollar Rallies on Hawkish Fed Comments

The dollar index (DXY00) on Tuesday rallied by +0.75%, recovering from Monday’s 1-month low.  The dollar was supported by hawkish Fed comments and a sharp +19 bp rise in the 10-year T-note yield to 2.76%.

Comments by several Fed officials on Tuesday seemed tailored to push back against the market’s hope the Fed might curb its rate-hike ambitions after last week’s news of a -0.9% (q/q annualized) decline in Q2 GDP, which fulfilled the technical definition of a recession of back-to-back quarterly GDP declines (Q1 -1.6%).

San Francisco Fed President Mary Daly said Tuesday that the Fed is “nowhere near almost done” on curbing the inflation rate.  However, she had some soothing comments for the stock market by saying that she doesn’t see a labor market that is in a recession.

Meanwhile, Cleveland Fed President Loretta Mester said that the Fed is “very focused” on bringing down inflation “because that is the bedrock of making sure that we will have sustainable healthy labor markets over the medium and the longer run.”  Ms. Mester said she doesn’t see anything suggesting that inflation is leveling off.  She said she doesn’t believe the U.S. is in a recession.

Chicago Fed President Charles Evans said that he sees a 50 bp rate hike at the September FOMC meeting as reasonable but that 75 bp could be ok, and that he hopes that 25 bp hikes after September are reasonable.

The dollar saw some early buying on safe-haven demand ahead of House Speaker Pelosi’s visit to Taiwan, but safe-haven demand ebbed after there were no military confrontations associated with the trip thus far.

EUR/USD (^EURUSD) on Tuesday fell by -0.0081 (-0.78%), mainly due to dollar strength.  USD/JPY (^USDJPY) Tuesday rose sharply by +0.97%.  Capital repatriation demand from Japanese investors was undercut after Ms. Pelosi landed in Taiwan with no military incidents.

October gold (GCV22) Tuesday rose by +2.10 (+0.12%), and September silver (SIU22) fell by -0.223 (-1.10%).  Gold closed mildly higher on safe-haven demand tied to Taiwan, but was undercut by the rally in the dollar and the sharp rise in T-note yields.  Silver was undercut by hawkish Fed comments and concern about the U.S. and global economies.

• U.S. Stocks Lower on Taiwan Tensions
• Dollar Falls on Lower T-Note Yields
• U.S. Stocks Mixed With Focus on Taiwan and T-note Yield
• Dollar Falls on Soaring Stocks and Lower T-Note Yields