Dollar Climbs on Hawkish Fed

The dollar index (DXY00) on Friday rose by +0.30%.  The dollar Friday shook off early losses and moved higher on hawkish comments from Fed Chair Powell, who warned against "prematurely" loosening monetary policy.  Also, a selloff in stocks Friday boosted the liquidity demand for the dollar.  However, gains in the dollar Friday were limited by mixed U.S. economic news.

Friday’s U.S. economic news was mixed for the dollar.  On the bullish side, University of Michigan Aug consumer sentiment was revised upward by +3.1 to 58.2, stronger than expectations of 55.5.  Conversely, July personal spending rose +0.1% m/m, weaker than expectations of +0.5% m/m.  Also, July personal income rose +0.2% m/m, weaker than expectations of +0.6% m/m.

Fed comments Friday were hawkish for monetary policy and bullish for the dollar.  Fed Chair Powell said history cautions against "prematurely" loosening monetary policy and that “restoring price stability will likely require maintaining a restrictive policy stance for some time.”  Also, Cleveland Fed President Mester said the Fed is "all in" against inflation and may have to move interest rates above 4% and hold them there in 2023 to curb price pressures.

EUR/USD (^EURUSD) on Friday fell by -0.11%.  The euro Friday erased an early rally and posted modest losses. Concern that soaring energy prices will push the Eurozone economy into recession is bearish for EUR/USD. European nat-gas prices jumped more than +6% Friday to a new 5-1/2 month high, which pushed German electricity prices for next year to a record 995 euros a megawatt-hour and French electricity prices to a record 1,130 euros a megawatt-hour.

EUR/USD Friday initially moved higher after a report from Reuters said that some ECB officials want to discuss a 75 bp rate hike at next month’s policy meeting due to rising inflation. The Reuters report also boosted German bund yields that strengthened the euro’s interest rate differentials after the 10-year German bund yield climbed to a 1-3/4 month high Friday at 1.437%. 

Friday’s Eurozone economic news was mixed for EUR/USD.  On the positive side, the Eurozone July M3 money supply rose +5.5% y/y, right on expectations and the slowest pace of increase in 2-1/2 years.  Conversely, German Sep GfK consumer confidence fell -5.6 to a record low -36.5, weaker than expectations of -32.0.

USD/JPY (^USDJPY) on Friday rose by +0.71%.  The yen on Friday weakened moderately as hawkish comments from Fed Chair Powel pushed T-note yields higher.  Powell’s comments also signal the divergence in central bank policies that are negative for the yen, with the Fed in the middle of a rate hike cycle while the BOJ maintains QE and record low-interest rates. 

October gold (GCV22) Friday closed down -21.20 (-1.20%), and September silver (SIU22) closed down -0.374 (-1.96%).  Gold and silver prices Friday closed moderately lower.  A stronger dollar Friday weighed on metals prices along with comments from Fed Chair Powell, who said, “restoring price stability will likely require maintaining a restrictive policy stance for some time.”  Higher global bond yields Friday undercut gold prices, along with the report from Reuters that ECB officials are discussing raising interest rates by 75 bp at next month’s ECB meeting.

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