Dollar Strengthens with T-Note Yields

Dollar Strengthens with T-Note Yields

On Friday, the dollar index (DXY) went up by +0.08%, reaching a new high in 2-1/2 months. The dollar gained support from increased bond yields following an unexpected rise in U.S. August inflation expectations, which indicates a more hawkish stance for the Federal Reserve’s policy. However, the dollar’s gains were tempered by cautious comments from Fed Chair Powell, who suggested a cautious approach to future rate hikes. The dollar also faced downward pressure due to an unforeseen downward revision in the U.S. August consumer sentiment index from the University of Michigan.

Economic news from the U.S. on Friday presented a mixed picture for the dollar. On the positive side, the University of Michigan’s 1-year inflation expectations for August rose to 3.5%, surpassing the expected 3.3%. Additionally, the 5-10-year inflation expectations increased to +3.0%, higher than the anticipated 2.9%. Conversely, the University of Michigan’s August consumer sentiment index was revised down by -1.7 to 69.5, falling short of the expected 71.2.

Also read: Gold Updates: 25/8/2023

Fed comments on Friday also contributed to mixed signals for the dollar. Powell’s remarks leaned toward a hawkish perspective, stating that the Fed is prepared to further raise rates if necessary to control inflation. However, he also indicated a careful approach to future rate hikes due to the potential lingering effects of past rate increases.

EUR/USD experienced a decline of -0.01% on Friday, marking a 2-1/2 month low. The euro faced pressure from a stronger dollar and concerns about Eurozone economic conditions, exacerbated by a larger-than-expected drop in the German August IFO business climate index. The currency pair managed to recover some losses following hawkish statements from ECB President Lagarde, emphasizing maintaining interest rates at restrictive levels, and ECB Governing Council member Nagel, suggesting no pause in ECB interest rate increases.

The German August IFO business climate index fell by -1.7 to a 10-month low of 85.7, missing the forecasted 86.8.

Lagarde stated that the ECB plans to maintain interest rates at sufficiently restrictive levels for as long as needed to achieve its 2% inflation target.

Nagel added that considering inflation remains around 5%, it’s too early to contemplate a halt in interest rate increases.

USD/JPY advanced by +0.36% on Friday, with the yen hitting a 9-1/2 month low against the dollar. The yen’s decline can be attributed to divergent central bank policies, as the Federal Reserve and ECB expressed intentions to keep restrictive monetary policies, while the Bank of Japan continues with QE and record-low rates. Additionally, higher T-note yields on Friday contributed to the yen’s weakness.

Japan’s July PPI services prices increased by +1.7% y/y, surpassing the expected +1.3% y/y.

August Tokyo CPI for Japan eased to 2.9% y/y from 3.2% y/y in July, falling short of the forecasted +3.0% y/y, marking the slowest increase in 11 months. However, the August Tokyo CPI excluding fresh food and energy remained steady at a 41-year high of +4.0% y/y, matching July’s figure.

October gold (GCV3) concluded Friday with a decrease of -7.2 (-0.37%), while September silver (SIU23) closed with an increase of +0.04 (+0.02%). Precious metals prices experienced a mixed outcome on Friday. The dollar index’s rally to a 2-1/2 month high negatively affected metals. Furthermore, higher T-note yields on Friday had an adverse impact on precious metals. The losses in the precious metals market were mitigated by Powell’s remarks, hinting at a cautious stance on future rate hikes, possibly indicating a pause in the Federal Reserve’s interest rate adjustments.

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