Dollar Index (DXY)

The Dollar Index (DXY) registered a +0.27% gain on Wednesday, reaching a 1-1/4 month high. The rise in US Treasury yields provided modest support for the dollar, while a decline in the S&P 500 to a 5-week low triggered a demand for dollar liquidity. Additionally, the yuan’s weakness against the dollar, due to Chinese economic concerns, further boosted the dollar’s strength. The dollar’s gains accelerated following the release of the minutes from the July FOMC meeting, which highlighted policymakers’ recognition of “significant” inflation risks that might warrant additional rate hikes.

US Economic News

Mixed US economic data emerged on Wednesday. July housing starts rose by +3.9% m/m to 1.452 million, surpassing expectations. Manufacturing production for July unexpectedly increased by +0.5% m/m, also exceeding forecasts. Conversely, building permits for July, indicating future construction, rose by +0.1% m/m to 1.442 million, falling short of expectations.

 

EUR/USD

EUR/USD dropped by -0.29% on Wednesday, hitting a 1-1/4 month low. The euro initially gained ground but retreated as the dollar strengthened due to the hawkish minutes from the July FOMC meeting. Earlier, the euro had risen following the unexpected increase in Eurozone industrial production for June, which expanded by +0.5% m/m.

USD/JPY

USD/JPY climbed by +0.53% on Wednesday, with the yen reaching a 9-1/4 month low against the dollar. The yen’s decline was influenced by the divergence in central bank policies, as the BOE, ECB, and Fed continued their rate hiking cycles, while the BOJ maintained its QE and record-low interest rates. The yen’s losses accelerated as the 10-year T-note yield reached a 9-1/2 month high.

Precious Metals

October gold (GCV3) closed down -0.35% on Wednesday, while September silver (SIU23) closed down -0.53%. Precious metals faced downward pressure as a stronger dollar and higher global bond yields weighed on their prices. The hawkish minutes from the July FOMC meeting, emphasizing inflation risks, further contributed to losses. JPMorgan Chase and Barclays cutting their China 2023 GDP estimates added bearish sentiment to silver prices. Additionally, fund liquidation in gold persisted as holdings in ETFs dropped to a 3-1/3 year low.

Market Impact

The Dollar Index’s surge, driven by hawkish Fed minutes, influenced the performance of major currency pairs and precious metals. The increased likelihood of additional rate hikes as a response to inflation risks created a more favorable environment for the dollar, which in turn dampened the appeal of precious metals. These dynamics highlight the intricate interplay between central bank policies and their impact on global markets.

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