The dollar index (DXY00) Tuesday rose slightly by +0.02%, supported by higher T-note yields. Also, hawkish Fed comments supported the dollar. New York Fed President Williams said the Fed is "well positioned" to pull off a soft landing for the US economy, and St. Louis Fed President Musalem warned of easing monetary policy too quickly. In addition, Tuesday’s news that the US Aug trade deficit fell to a 5-month low supported the dollar. Tuesday’s rally in stocks curbed liquidity demand for the dollar.
Monday evening, St. Louis Fed President Musalem said, "Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late."
Fed Governor Kugler said the Fed should keep its focus on bringing inflation back to its 2% target, though with a "balanced approach" that avoids an "undesirable" slowdown in employment growth and economic expansion.
The US Aug trade deficit eased to a 5-month low of -$70.4 billion from -$78.9 billion in July, a smaller deficit than expectations of -$70.5 billion.
The markets are discounting the chances at 88% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 0% for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Tuesday fell by -0.05%. The euro on Tuesday gave back early gains and moved slightly lower, based on dovish comments from ECB Executive Board member Elderson and ECB Governing Council member Nagel, who expressed support for the ECB in continuing to cut interest rates. Losses in the euro were limited by Tuesday’s news, which showed that German August industrial production rose by the most in 2-3/4 years.
German Aug industrial production rose +2.9% m/m, stronger than expectations of +0.8% m/m and the largest increase in 2-3/4 years.
ECB Executive Board member Elderson said the Eurozone economy is weaker than expected, and "if our projections that inflation will converge toward our 2% target in the second half of 2025 continue to be confirmed, the ECB will continue to gradually ease its restrictive policy stance."
ECB Governing Council member and Bundesbank President Nagel said "he's open to considering the possibility" of an ECB interest rate cut at next week's ECB meeting.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 95% for the October 17 meeting and at 100% for that -25 bp rate cut at the December 12 meeting.
USD/JPY (^USDJPY) Tuesday rose by +0.12%. The yen on Tuesday gave up an early advance and turned lower on higher T-note yields. The yen was also under pressure after Tuesday’s economic news showed the Japan Sep eco watchers outlook survey unexpectedly declined. Losses in the yen were contained after news that showed Japan's labor cash earnings rose more than expected, a hawkish factor for BOJ policy. The yen also has safe-haven support from heightened Middle East tensions.
Japan Aug labor cash earnings rose +3.0% y/y, stronger than expectations of +2.9% y/y.
Japan Aug household spending fell -1.9% y/y, the biggest decline in 7 months but smaller than expectations of -2.6% y/y.
The Japan Sep eco watchers outlook survey unexpectedly fell -0.6 to 49.7, weaker than expectations of an increase to 50.5.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 2% for the October 30-31 meeting and at +21% for that +10 bp rate hike at the December 18-19 meeting.
December gold (GCZ24) Tuesday closed down -30.60 (-1.15%), and December silver (SIZ24) closed down -1.404 (-4.39%). Precious metals Tuesday sold off to 2-week lows and settled sharply lower. Higher global government bond yields Tuesday sparked long liquidation in precious metals. Also, hawkish Fed comments weighed on gold prices after New York Fed President Williams said the Fed is "well positioned" to pull off a soft landing for the US economy and St. Louis Fed President Musalem warned of easing monetary policy too quickly. Silver prices also retreated on negative carryover from a slide in copper prices Tuesday to a 2-week low after China’s economic planning agency failed to announce any new significant stimulus measures.
Precious metals have continued safe-haven demand from Middle East tensions, with the markets awaiting Israel’s response to last Tuesday’s missile barrage from Iran. Also, dovish comments Tuesday from ECB Governing Council member and Bundesbank President Nagel boosted demand for gold as a store of value when he said "he's open to considering the possibility" of an ECB interest rate cut at next week's ECB meeting.
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.
