Dollar Slumps as Powell Signals Interest Rate Cuts

The dollar index (DXY00) Friday fell -0.84% and posted a 13-month low.  The dollar retreated Friday on a decline in T-note yields.  Also, the strength in stocks Friday reduced liquidity demand for the dollar.  In addition, dovish comments from Atlanta Fed President Bostic weighed on the dollar when he said it’s possible that more than one interest rate cut by the Fed may now be needed by year-end.  The dollar dropped to its lows Friday after Fed Chair Powell said, “The time has come for policy to adjust.”  The dollar declined despite Friday’s stronger-than-expected US July new home sales report.

US July new home sales rose +10.6% m/m to a 14-month high of 739,000, stronger than expectations of 623,000.

Fed Chair Powell said cooling in the labor market conditions is “unmistakable,” and his confidence has grown that inflation is on the path to 2%.  Therefore, “the time has come for policy to adjust.”

Atlanta Fed President Bostic said it’s possible that more than one interest rate cut by the Fed may now be needed by year-end as inflation had slowed more than he had expected.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 36% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Friday rose by +0.71% and posted a 13-month high. The euro rallied Friday on weakness in the dollar.  Also, Friday’s monthly Eurozone inflation expectations report was stronger than expected, a hawkish factor for ECB policy. 

Dovish ECB comments Friday were bearish for the euro.   ECB Governing Council member Vujcic said, “As long as data fall in line with our projections, which foresee inflation to fall to 2% in 2025, that increases confidence that we can gradually ease the restrictiveness of our monetary policy.”  Also, ECB Governing Council member Rehn said the slowdown in inflation alongside weakness in the Eurozone economy strengthened arguments for the ECB to lower borrowing costs next month.

The ECB’s Eurozone July 1-year inflation expectations indicator was unchanged from June at 2.8%, stronger than expectations of an easing to 2.7%.  Also, the July 3-year inflation expectations indicator unexpectedly rose to 2.4% from 2.3% in June, which was stronger than the expectations of no change at 2.3%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 94% for the September 12 meeting.

USD/JPY (^USDJPY) Friday fell by -1.44%.  The yen rallied to a 2-week high against the dollar Friday after T-note yields plunged on dovish comments from Fed Chair Powell.  The yen also garnered support Friday on comments from BOJ Governor Ueda, who said policymakers are still on a path toward higher interest rates.  In addition, today’s Japan July CPI report was stronger than expected, a hawkish factor for BOJ policy and supportive of the yen.

BOJ Governor Ueda said, “If we are able to confirm a rising certainty that the economy and prices will stay in line with forecasts, there’s no change to our stance that we’ll continue to adjust the degree of easing.”

Japan’s July national CPI was unchanged from June at +2.8% y/y, stronger than expectations of an easing to 2.7% y/y.  Japan’s July national CPI ex-fresh food and energy eased to +1.9% y/y from +2.2% y/y in Jun, right on expectations and the slowest pace of increase in 1-3/4 years.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +10% for the October 30-31 meeting.

December gold (GCZ24) Friday closed up +29.60 (+1.18%), and September silver (SIU24) closed up +0.773 (+2.66%).   Precious metals Friday posted moderate gains on Friday’s slump in the dollar index to a 13-month low.  Also, lower global bond yields Friday were supportive of precious metals.   In addition, dovish comments Friday from ECB Governing Council member Vujcic prices were positive for gold demand as a store of value when he said the ECB has room to cut interest rates as inflation converges toward 2%.  Finally, safe-haven demand for precious metals remains strong on concern that Iran may yet attack Israel as retaliation for the recent assassination of a Hamas political leader in Tehran.  Precious metals raced to their highs Friday on dovish comments from Fed Chair Powell, who signaled lower interest rates when he said, “the time has come for policy to adjust.”

Strength in stocks Friday curbed some safe-haven demand for precious metals.  Also, hawkish comments Friday from BOJ Governor Ueda were bearish for gold when he said policymakers were still on a path toward higher interest rates. In addition, Friday’s monthly report from the ECB on Eurozone inflation expectations was stronger than expected, which is a hawkish factor for ECB policy and negative for gold.

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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.

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