Dollar Gains on China’s Interest Rate Cut

The dollar index (DXY00) on Monday rose by +0.84%.  Weakness in the Chinese yuan was positive for the dollar as the yuan fell to a 1-1/2 week low against the dollar after the PBOC Monday unexpectedly lowered interest rates.   Also, signs of weakness in the global economy boosted safe-haven demand for the dollar after Monday’s Chinese economic data was weaker than expected.  However, gains in the dollar were contained Monday due to weaker-than-expected U.S. economic data and lower T-note yields.

U.S. economic data Monday was bearish for the dollar.  Aug Empire manufacturing survey general business conditions plunged -42.2 to -31.3, weaker than expectations of 5.0 and the steepest pace of contraction in 2-1/4 years.  Also, the Aug NAHB housing market index fell -6 to a 2-1/4 year low of 49, weaker than expectations of 54.

The Peoples Bank of China (PBOC) unexpectedly cut its 7-day reverse repurchase rate by 10 bp to 2.00% and cut its 1-year medium-term lending facility rate by 10 bp to 2.75%.

EUR/USD (^EURUSD) on Monday fell by -0.99%.  The euro dropped to a 1-week low Monday on dollar strength. EUR/USD was also under pressure Monday on concern an energy crisis could send the EU into recession.  The energy crisis is being exacerbated by a drought in Europe that is cutting water levels in key rivers throughout Europe, making it difficult to deliver diesel, coal, and other energy supplies.

The German July wholesale price index rose +19.5% y/y, the slowest pace of increase in 5 months.

USD/JPY (^USDJPY) on Monday fell -0.09%.  Monday’s upward revision to Japan’s June industrial production was supportive of the yen.  Also, a more than -2% plunge in crude oil prices Monday to a 6-1/2 month low was bullish for the yen.  However, gains in the yen were contained after Japan Q2 GDP grew less than expected.

Japan June industrial production was revised upward by +0.3 to up +9.2% m/m from the previously reported +8.9% m/m.

Japan Q2 GDP rose +2.2% (q/q annualized), weaker than expectations of +2.6%.  The Q2 deflator fell -0.4% y/y, a smaller decline than expectations of -0.8% y/y.

October gold (GCV22) on Monday closed down -17.30 (-0.96%), and September silver (SIU22) closed down -0.426 (-2.06%).  Precious metals Monday posted moderate losses.  A stronger dollar Monday weighed on metals prices.  Ongoing liquidation of long gold positions by funds also undercut gold prices after long gold positions in ETFs fell to a 5-1/2 month low last Friday.  Silver was also under pressure on industrial metals demand concerns after Monday’s weaker-than-expected U.S. and Chinese economic data.  Gold garnered some support Monday after the PBOC unexpectedly cut interest rates.  Also, lower global bond yields Monday were supportive of gold prices.

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