Dollar Gains on Higher T-Note Yields

The dollar index (DXY00) on Wednesday rose by +0.05%.  The dollar index Wednesday posted modest gains and remained below Tuesday’s 2-1/2 week high.  Higher T-note yields Wednesday supported the dollar after the 10-year T-note yield climbed to a 3-1/2 week high.  However, the dollar gave up most of its advance Wednesday afternoon on the dovish minutes of the July 26-27 FOMC meeting, where Fed officials said: “it would become appropriate at some point to slow the pace of policy rate increases.”

U.S. retail sales data Wednesday was mixed for the dollar.  On the negative side, July retail sales were unchanged m/m, weaker than expectations of +0.1% m/m.  However, July retail sales ex-autos unexpectedly rose +0.4% m/m, stronger than expectations for a -0.1% m/m decline.

The July 26-27 FOMC meeting minutes were dovish and negative for the dollar.  The minutes stated that "as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation." Also, many Fed officials saw a risk to over tightening, because of constant changes in the economic environment and the lag effect of monetary policy, saying "the committee could tighten the stance of policy by more than necessary to restore price stability."

EUR/USD (^EURUSD) on Wednesday rose by +0.12%.  Higher European government bond yields Wednesday supported the euro after the 10-year German bund yield climbed to a 3-1/2 week high.  However, gains in EUR/US were limited due to weaker-than-expected Eurozone economic data Wednesday on Q2 GDP and Q2 employment.

Eurozone Q2 GDP was revised lower to +0.6% q/q and +3.9% y/y from the previously reported +0.7% q/q and +4.0% y/y.

Eurozone Q2 employment rose +0.3% q/q and +2.4% yy/y, weaker than the +0.6% q/q and +2.9% y/y pace from Q1.

USD/JPY (^USDJPY) on Wednesday rose +0.61%.  Higher T-note yields Wednesday were bearish for the yen. Also, the widening of Japan’s July trade deficit to a record weighed on the yen as the record deficit has negative implications for Japan’s Q3 GDP.  In addition, Wednesday’s rally in the Nikkei Stock Index to a 7-1/2 month high reduced the safe-haven demand for the yen.

Japan's July adjusted trade deficit was a record -2.133 trillion yen, wider than expectations of -1.915 trillion yen.  Japan July exports rose +19.0% y/y, stronger than expectations of +17.6% y/y.  July imports rose +47.2% y/y, stronger than expectations of +45.5% y/y.

Japan June core machine orders rose +0.9% m/m and +6.5% y/y, weaker than expectations of +1.0% q/q and +7.7% y/y.

October gold (GCV22) Wednesday closed down -12.90 (-0.72%), and September silver (SIU22) closed down -0.354 (-1.76%).  Precious metals Wednesday settled moderately lower, with gold falling to a 2-week low and silver falling to a 1-1/2 week low.  A stronger dollar early Wednesday weighed on metals prices.  Also, higher global bond yields Wednesday undercut gold prices.  In addition, the ongoing liquidation of long gold positions by funds is bearish for gold prices after long gold positions in ETFs fell to a 5-1/2 month low Tuesday. Gold prices moved above their Wednesday afternoon closing level after the dovish minutes of the July 26-27 FOMC meeting were released.

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