Dollar Slips on Strength in EUR/USD

The dollar index (DXY00) on Tuesday fell by -0.08%.  The dollar Tuesday posted modest losses as it is consolidated just below Monday’s new 20-year high.  Strength in EUR/USD Tuesday sparked long liquidation in the dollar.  However, better-than-expected U.S. economic news Tuesday and several hawkish Fed comments limited declines in the dollar.  Also, a slump in the S&P 500 to a 1-month low sparked some liquidity demand for the dollar. 

Tuesday’s U.S. economic news was hawkish for Fed policy and bullish for the dollar.  The Conference Board U.S. Aug consumer confidence index rose +7.9 to 103.2, stronger than expectations of 98.0.  Also, the July JOLTS job openings unexpectedly rose +199,000 to 11.239 million, showing a stronger labor market than expectations of a decline to 10.375 million.

Hawkish Fed commentary Tuesday was supportive of the dollar.  New York Fed President Williams said, "we need to have a somewhat restrictive policy to slow demand, and we're not there yet."  He added that the Fed will need to hold interest rates in restrictive territory for "some time," saying this meant through 2023. Also, Atlanta Fed President Bostic said the Fed can't afford to stop raising interest rates before bringing inflation back to the Fed's target, even if the result is higher unemployment for a time.  In addition, Richmond Fed President Barkin said interest rates will need to be restrictive to control inflation, and "the Fed is committed to returning inflation to its 2% target, and it will do what it takes to get there."

EUR/USD (^EURUSD) on Tuesday rose by +0.33%.  The euro Tuesday recovered from early losses and posted moderate gains on dollar weakness and hawkish ECB comments.  Also, Tuesday’s economic news showed German Aug consumer prices rising at a record +8.8% y/y pace, which pushed the 10-year German bund yield up to a 2-month high and strengthened the euro’s interest rate differentials.  In addition, the euro garnered support from falling nat-gas prices that ease concerns about an energy crisis after European nat-gas prices dropped more than -7% Tuesday to a 1-week low.  However, gains in EUR/USD were limited after Eurozone Aug economic confidence fell more than expected to a 1-1/2 year low.

German Aug CPI (EU harmonized) rose a record +8.8% y/y, up from +8.5% in July.

Eurozone Aug economic confidence fell -1.3 to a 1-1/2 year low of 97.6, weaker than expectations of 98.0. 

On Tuesday, ECB comments were hawkish for monetary policy and support of EUR/USD.  ECB Chief Economist Lane said the ECB needs a "steady pace" of interest rate increases in fighting record inflation to minimize negative consequences.  Also, ECB Governing Council member Vasle said, "we haven't seen the highest numbers for inflation in the Eurozone," and he expects inflation to peak next quarter before subsiding in the first half of 2023.

USD/JPY (^USDJPY) on Tuesday rose by +0.02%.  The yen Tuesday dropped to a 1-1/2 month low against the dollar. An increase in the 10-year T-note yield Tuesday to a 2-month high undercut the yen.  Losses in the yen were limited on positive Japanese economic news Tuesday that showed the Japan July job-to-applicant ratio unexpectedly rose +0.02 to a 2-1/4 year high of 1.29, showing a stronger labor market than expectations of 1.27. 

October gold (GCV22) Tuesday closed down -13.60 (-0.78%), and September silver (SIU22) closed down -0.398 (-2.14%).  Gold and silver prices Tuesday posted moderate losses, with silver falling to a 1-1/2 month low.  Hawkish central bank comments Tuesday signal higher interest rates that pushed up bond yields and are bearish for gold.  Also, continued liquidation from funds weighs on gold prices after long gold positions in ETFs fell to a 6-month low Monday. 

• Stocks Decline as T-note Yields Climb on Strong U.S. Economic News
• Dollar Gains as T-Note Yields Rise
• Stocks Fall as the Outlook for Tighter Fed Policy Saps Market Sentiment
• Dollar Climbs on Hawkish Fed