The dollar index (DXY00) on Friday rose by +0.08% and posted a new 2-1/2 month high. The dollar found support Friday from higher bond yields after the University of Michigan U.S. Aug inflation expectations unexpectedly rose, which is hawkish for Fed policy. Gains in the dollar were limited on dovish comments from Fed Chair Powell, who signaled a pause in Fed rate hikes when he said the Fed "will proceed carefully" on whether to hike again. Also, an unexpected downward revision to the University of Michigan U.S. Aug consumer sentiment index was bearish for the dollar.
U.S. economic news Friday was mixed for the dollar. On the bullish side, the University of Michigan U.S. 1-year inflation expectations for Aug rose to 3.5%, stronger than expectations of no change at 3.3%. Also, the 5-10-year inflation expectations rose to +3.0%, stronger than expectations of no change at 2.9%. On the negative side, the University of Michigan U.S. Aug consumer sentiment index was revised down by -1.7 to 69.5, weaker than expectations of no change at 71.2.
Fed comments Friday were mixed for the dollar. On the hawkish side, Fed Chair Powell said, "Although inflation has moved down from its peak it remains too high and we are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our 2% objective." Also, Cleveland Fed President Mester said "we probably have some more work to do" as core inflation is still running too high and policymakers have to be "diligent" as they work to bring inflation on a steady path down to 2%.
On the dovish side, Fed Chair Powell said that the Fed "will proceed carefully" on whether to hike again as there may still be significant further drag from past rate hikes.
EUR/USD (^EURUSD) on Friday fell by -0.01% and posted a 2-1/2 month low. The euro was under pressure Friday from a stronger dollar and on Eurozone economic concerns after the German Aug IFO business climate fell more than expected to a 10-month low. EUR/USD recovered most of its losses on hawkish comments from ECB President Lagarde, who said the ECB “will set interest rates at sufficiently restrictive levels for as long as necessary,” and from ECB Governing Council member Nagel, who said "it's much too early to think about a pause" in ECB interest rate increases.
The German Aug IFO business climate fell -1.7 to a 10-month low of 85.7, weaker than expectations of 86.8.
ECB President Lagarde said the ECB will "set interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target."
ECB Governing Council member Nagel said with inflation still around 5%, "it's much too early to think about a pause" in interest rate increases.
USD/JPY (^USDJPY) on Friday rose by +0.36%. The yen on Friday tumbled to a 9-1/2 month low against the dollar. Central bank divergence was the main bearish factor for the yen as Federal Reserve and ECB policymakers Friday talked about keeping restrictive monetary policies to control inflation while the BOJ maintains QE and record low rates. Higher T-note yields Friday also weighed on the yen.
Japan Jul PPI services prices rose +1.7% y/y, stronger than expectations of +1.3% y/y.
Japan Aug Tokyo CPI eased to 2.9% y/y from 3.2% y/y in July, weaker than expectations of +3.0% y/y and the slowest pace of increase in 11 months. However, Aug Tokyo CPI ex-fresh food and energy remained unchanged from Jul at a 41-year high of +4.0% y/y.
October gold (GCV3) Friday closed down -7.2 (-0.37%), and Sep silver (SIU23) closed up +0.04 (+0.02%). Precious metals prices Friday settled mixed. Friday’s rally in the dollar index to a 2-1/2 month high was bearish for metals. Also, higher T-note yields on Friday were negative for precious metals. Losses in metals were limited by comments from Fed Chair Powell, who said the Fed "will proceed carefully" on whether to hike again, possibly signaling a pause in Fed interest rate hikes.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
