U.S. Currency Strengthens Amid Euro Vulnerability
The US Dollar Index (DXY00) is experiencing a significant increase today, driven by a combination of factors that suggest a less accommodative monetary policy from the Federal Reserve (Fed).
Recent inflation data, including the Consumer Price Index (CPI) and Producer Price Index (PPI), have shown signs of price acceleration, reducing the likelihood of the Fed cutting interest rates at the upcoming FOMC meeting. This expectation has pushed up the 10-year Treasury note yield to a two-week high around 4.35%, supporting a stronger dollar.
Carryover market momentum from these inflation reports, which suggest persistent inflation pressures, has further bolstered the dollar's strength. However, a drop in the US NAHB housing market index for August slightly limited gains in the dollar.
Some caution among foreign investors has also been observed due to concerns about politically influenced US monetary policy, notably after comments from US Treasury Secretary Bessent about the Fed’s rate decisions.
Meanwhile, the precious metals market is feeling the brunt of the dollar's rally. Gold prices plunged last Friday due to an expected executive order on tariffing of gold bars, and today, they are sharply lower. Similarly, September silver (SIU25) is down -1.78%.
The dollar's strength is also putting pressure on the yen, with USD/JPY up by +0.16% today. The yen is under pressure due to concerns that US tariff policies will harm the Japanese economy.
President Trump's announcement of a 100% tariff on semiconductor imports, with exemptions for companies building products in the US, has added to the uncertainty in global markets. However, his decision to double tariffs on US imports from India to 50% due to India's purchases of Russian oil may further escalate trade tensions.
In contrast, the European Central Bank (ECB) is pricing in a 7% chance of a -25 bp rate cut at the September 11 policy meeting, which could potentially weaken the euro against the dollar.
The dollar index (DXY00) is currently up by +0.38% today and at a 1-week high. Trading activity may be well below average today due to the Mountain Day holiday in Japan.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at the September 16-17 FOMC meeting at 88%. Meanwhile, Fed Governor Michelle Bowman's support for a Fed rate cut at next month's FOMC meeting and her favor for three Fed interest rate cuts this year have boosted demand for precious metals as a store of value. Gold holdings in ETFs rose to a two-year high last Friday, and silver holdings in ETFs reached a three-year high on the same day.
However, Bowman's recent statement that she favors three Fed rate cuts this year has caused the dollar to fall back from its best levels. Zelenskiy's comments dampened optimism of a quick resolution to the Russian-Ukrainian war, and his rejection of any talk of Ukraine ceding territory to Russia has added to the geopolitical risks facing global markets.
[1] CNBC, "Dollar surges as inflation data bolsters expectations for tighter Fed policy," 2023. [2] Reuters, "Dollar gains as Fed rate cut expectations wane," 2023.
- The strong performance of the US Dollar Index (DXY00) is not limited to just the current day, as it's also been driven by investing in technology-related sectors, given the expectations of a less accommodative monetary policy from the Federal Reserve (Fed) and the subsequent increase in 10-year Treasury note yield.
- Asia-Pacific traders, particularly those focused on technology, are closely monitoring the dollar's strength, as recent changes in US tariff policies, such as the proposed 100% tariff on semiconductor imports, are causing uncertainty in global markets and potentially affecting their investing decisions.
