Dollar Recovers Some of the Week’s Losses

The dollar index (DXY00) on Friday rose by +0.51% and recovered mildly from Wednesday’s 5-week low.  Still, the dollar closed -0.9% lower on the week.

The dollar on Friday saw support from the stronger-than-expected U.S. consumer sentiment report.  However, there was carry-over bearish sentiment for the dollar based on the favorable CPI and PPI reports seen mid-week, which put Fed policy in a more dovish light.

The University of Michigan reported that its preliminary-Aug U.S. consumer sentiment index rose by +3.6 points to a 3-month high of 55.1, which was stronger than market expectations of +1.0 point to 52.5.  The uptick in consumer sentiment was a step in the right direction, but the index is still only 5.1 points above June’s record low of 50.0 (data since 1978).  Consumers remain worried about inflation, high gasoline prices, rising interest rates, and a weakening labor market if the economy continues to slide.

There was some good news on the inflation front with Friday’s report that U.S. July import prices fell -1.4% m/m and eased to +8.8% y/y from June’s +10.7%.  U.S. July import prices ex-petroleum fell -0.7% m/m, adding to June’s revised -0.5% m/m drop.

San Francisco Fed President Mary Daly said in an interview late Thursday that her base case is for a +50 bp rate hike at the Sep 20-21 FOMC meeting but that she has an “open mind” about whether a larger rate hike might be necessary.  She said the July inflation figures are “significant in that they are saying that we’re seeing some improvement, but they’re not victory.” 

In a bearish factor for the dollar, this week’s favorable CPI and PPI reports caused the markets to scale back expectations for a +75 bp rate hike at the Sep 20-21 FOMC meeting to about 50-50 versus the previous view of a very strong chance.  The July CPI on Wednesday fell by -0.6 points to +8.5% y/y from June’s 40-year peak of +9.1%.  The July core CPI was unchanged from June at +5.9% y/y and remained -0.6 points below the 40-year peak of +6.5% y/y posted earlier this year in March. 

EUR/USD (^EURUSD) on Friday fell by -0.57%.  The euro failed to get much traction from the bullish news that Eurozone June industrial production rose by +0.7% m/m and +2.4% y/y, which was stronger than expectations of +0.2% m/m and +1.2% y/y, and added to May’s increase of +0.8% m/m.  USD/JPY (^USDJPY) on Friday rose +0.44%.

October gold (GCV22) on Friday closed up +8.40 (+0.47%), and September silver (SIU22) closed up +0.349 (+1.72%).  Gold prices saw carry-over support from this week’s dovish turn in expectations for Fed policy.  Gold rallied despite Friday’s stronger dollar.  Silver saw some strength from Friday’s stronger-than-expected U.S. consumer sentiment index, which put the U.S. economy is a slightly better light.

• Stocks Higher on Consumer Sentiment Optimism
• Dollar Remains Weak on Dovish PPI Report
• Stocks Rally as PPI Report Fuels Hopes for Less Hawkish Fed
• Dollar Falls Sharply on Dovish U.S. CPI Report