Dollar Erases Early Gains as Manufacturing Output and Leading Indicators Both Decline

On Friday, the dollar gave up an early gain after US economic data came in weaker than expected, while the yen declined to a two-week low against the dollar. The prices of precious metals rose, reaching one-week highs as the dollar index retreated from a seven-week high.

On Friday, the dollar index (DXY00) gave back some gains, sliding below a seven-week high to close down by -0.03%. The dollar had briefly risen earlier in the day, driven by a weaker Japanese yen that fell to a two-week low. Higher US T-note yields on Friday also helped the dollar. The dollar carried over support from Wednesday, when the Federal Open Market Committee raised interest rates by 25 basis points and signaled another hike by the end of the year.

The dollar gave up its best level since August after both manufacturing production and leading indicators declined for the month. US August manufacturing production unexpectedly fell -0.3% month over month, weaker than expectations of +0.3% m/m and the biggest drop in 10 months. US August leading indicators unexpectedly fell -0.1%, weaker than expectations of a +0.1% increase and the first decline in five months.

The odds for a +25 basis point increase in the federal funds rate at the October 27-28 FOMC meeting sit at 55%, as shown in current market pricing.

The Euro Rebounds

The EUR/USD recovered from a seven-week low on Friday and ended the day up by +0.10% as short positions were unwound. The dollar index came down from a seven-week high and headed lower, which helped the euro bounce back. German August producer prices rose more than expected, giving the euro extra support by pointing toward a more hawkish stance from the European Central Bank.

Today, Christine Lagarde, the president of the ECB, said that economic growth in the Eurozone looks somewhat brighter than anticipated during her remarks. The ECB’s August one-year CPI expectations moved up to +3.0%, up from +2.9% in July, though below the +3.1% that had been anticipated. For the August three-year CPI expectations, the reading climbed to +2.9%, up from +2.7% in July, and that reading exceeded the +2.8% that had been expected.

German August PPI rose +1.1% month over month and +4.6% year over year, stronger than expectations of +0.6% m/m and +3.9% y/y. The +4.6% y/y increase is the largest in 3.25 years.

Lagarde said economic growth in the Eurozone is a bit more promising than we thought, and we’re not seeing second-round effects on inflation yet. Markets are discounting a 62% chance of a +25 basis point ECB rate hike at the ECB’s next policy meeting on October 29.

The BOJ’s Rate Hike

On Friday, the exchange rate (^USDJPY) climbed by +0.41%, as the yen fell to a two-week low against the dollar. The Bank of Japan raised interest rates by 25 basis points, but two BOJ members were opposed to the move and dissented, arguing that no change in interest rates was warranted.

The year-over-year rise in Japan’s August national CPI was +1.9%, the same as July and below expectations of +2.0% y/y. August national CPI excluding fresh food and energy was +1.9% y/y, matching July’s result and below forecasts of +2.0% y/y.

Today, the BOJ increased its overnight call rate by 25 basis points to 1.25%, up from 1.00%, with the vote split 7-2. Governor Kazuo Ueda said the central bank plans to keep raising the rate in reaction to economic and price conditions.

Markets are pricing in an 18% chance of a +25 basis point BOJ rate hike at the next policy meeting on October 30.

What Precious Metals Did

On Friday, December COMEX gold (GCZ26) and December COMEX silver (SIZ26) both closed in positive territory. Gold rose +25.20 (+0.57%), and silver rose +1.054 (+1.59%). Precious metals prices shed early declines before finishing higher. The metals climbed to one-week highs as short covering emerged after the dollar index fell from a seven-week high.

Friday’s -1% fall in crude oil prices eased inflation expectations, which could prompt the world’s central banks to ease their monetary policies, a bullish factor for precious metals. Silver prices also found support on signs of stronger industrial metals demand in Europe after Lagarde said economic growth in the Eurozone is a bit more promising than we thought.

Friday began with gold prices falling, driven by a rally in the dollar index to a seven-week high. The move was compounded by higher global bond yields, which weighed on precious metals. The Bank of Japan’s rate hike of 25 basis points on Friday added further pressure, working against the sector.

Prices for precious metals are being boosted by recent fund support, with long holdings in gold ETFs reaching a 6.5-month high on Friday and long holdings in silver ETFs climbing to a 5.5-month high on August 25.

Gold prices are being supported by strong demand from central banks, following news from last Monday that the People’s Bank of China boosted its gold reserves by +650,000 ounces to 76.73 million troy ounces in August. This marks the largest increase in three years and extends a run of twenty-two straight months in which the PBOC has raised its gold holdings.

The Takeaway

The dollar rose on Friday before losing all its gains back on weaker US economic data. The yen fell to a two-week low against the dollar, with BOJ dissenters and Friday’s Japan Aug CPI report, which came in weaker than expected, both weighing on it individually. Precious metals finished higher after early losses, with gold and silver climbing to one-week highs.

The dollar’s early gain on Friday has been erased by weaker US economic news, and the yen’s decline shows a split in Japan’s policy picture. Precious metals finished higher after a mixed day of inflation data and central bank news.

Source material: “Dollar Erases Early Gains on Weak US Economic News,” Yahoo Finance.

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