The dollar index (DXY00) Wednesday fell by -0.51% and posted a 3-3/4 month low. The dollar is under pressure after US presidential candidate Trump said the recent strength of the dollar had hurt American competitiveness and that the weakness of the yen and yuan was a trading advantage for Japan and China. His comments bolstered speculation he may adopt policies to reduce the dollar's value if he becomes president. The dollar maintained moderate losses despite stronger-than-expected reports on US Jun housing starts, Jan manufacturing production, and hawkish comments from several Fed members. The Fed Beige Book was dovish and negative for the dollar.
US Jun housing starts rose +3.0% m/m to 1.353 million, stronger than expectations of 1.300 million. Jun building permits, a proxy for future construction, rose +3.4% m/m to 1.446 million, stronger than expectations of 1.400 million.
US Jun manufacturing production rose +0.4% m/m, stronger than expectations of +0.1% m/m.
Richmond Fed President Barkin said the breadth of recent disinflation has been encouraging, though he's "still looking for more" evidence it will be sustained.
Fed Governor Waller said the Fed is getting "closer" to cutting rates, but he'd like to see a "bit more evidence" inflation is on a sustained downward path.
New York Fed President Williams said current Fed policy is appropriate until we see "more data." He added that US inflation readings from the last three months are "getting us closer to a disinflationary trend that we're looking for, and I would like to see more data to gain further confidence inflation is moving sustainably to our 2% goal."
The Fed Beige Book said, "Expectations for the future of the economy were for slower growth over the next six months due to uncertainty around the upcoming election, domestic policy, geopolitical conflict, and inflation. Also, wages grew at a modest to moderate pace as prices rose modestly overall, and nearly every Fed district "mentioned retailers discounting items or price-sensitive consumers only purchasing essentials., trading down in quality, buying fewer items, or shopping around for the best deals."
The markets are discounting the chances for a -25 bp rate cut at 5% for the July 30-31 FOMC meeting and 100% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) Wednesday rose by +0.52% and posted a 4-month high. Wednesday’s slump in the dollar was supportive of the euro. Also, short covering boosted the euro ahead of Thursday’s ECB meeting, where the ECB is expected to keep monetary policy unchanged.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 3% for the July 18 meeting and 79% for the September 12 meeting.
USD/JPY (^USDJPY) Wednesday fell by -1.38%. The yen jumped to a 5-week high against the dollar Wednesday. Short covering emerged in the yen Wednesday, based on comments from US presidential candidate Trump, who said that the weakness of the yen was a trading advantage for Japan. Weakness in stocks Wednesday also boosted some safe-haven demand for the yen. Gains in the yen accelerated Wednesday after Kono Taro, a prominent minister running Japan’s digital agency, called on the BOJ to raise interest rates to boost the yen's value and bring down energy and food costs.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 58% for the July 31 meeting and 30% for the September 20 meeting.
August gold (GCQ24) Wednesday closed down -7.90 (-0.32%), and September silver (SIU24) closed down -1.081 (-3.44%). Precious metals prices Wednesday gave up an early advance and closed lower, with silver falling sharply to a 2-week low. Hawkish comments Wednesday from several Fed members weighed on precious metals when they said they want to wait for more evidence of inflation slowing before cutting interest rates. A bearish factor for silver prices was some negative carryover from Wednesday’s slide in copper prices to a 2-week low.
Precious metals Wednesday initially moved higher, with Aug gold posting a contract high. Wednesday’s slump in the dollar to a 3-3/4 month low is bullish for metals. Gold also has support on increased demand as an inflation hedge after the chances of former President Trump winning the election in November increased, which could boost inflation if he pursues new tax cuts and stimulative fiscal policies. Fund buying of gold also supports prices after long gold holdings in ETFs rose to a 3-1/4 month high Tuesday. Silver garnered some support from Wednesday’s stronger-than-expected US reports on Jun housing starts and Jun manufacturing production.
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.
