Stock Market Declines Allow Dollar to Rise in Value
The US dollar's current outlook remains a delicate balance, with moderate economic strengths countered by rising political and policy risks.
On Tuesday, December gold (GCZ25) closed down -19.30 (-0.57%), while the DXY00, a dollar index, experienced a modest rise of +0.12%. This increase can be attributed to euro weakness and rising Treasury yields, but gains remain limited due to concerns about Federal Reserve independence, potential politically driven monetary policy changes, and signs of slowing US economic growth.
The US economy has shown some mixed results in recent data releases. For instance, July retail sales rose 0.5% month-over-month, although consumer confidence weakened (-1.3 to 97.4 in August). Meanwhile, capital goods orders rose +1.1% m/m in July, but home price appreciation slowed to +2.14% y/y, the smallest in two years.
S&P Global Ratings affirmed its AA+ long-term rating and A-1+ short-term rating on US debt on Tuesday, providing some fundamental backing amid short-term volatility. However, geopolitical developments, such as the ongoing Ukraine crisis, inject uncertainty into the outlook.
President Zelenskiy announced he received a commitment from President Trump to join security guarantees for any peace deal, while European leaders are discussing a plan to send British and French troops to Ukraine. The upcoming Trump-Putin summit concerning Ukraine peace talks will likely have a significant impact on the dollar.
Treasury yields have been a key driver for the dollar. Lower T-note yields on Tuesday were bearish for the dollar, while higher Japanese government bond yields strengthened the yen's interest rate differentials and boosted the yen after the 10-year JGB bond yield rose to a 3-week high of 1.604%.
The markets have adjusted to the inflation outlook following last Thursday's hawkish PPI report, pulling back expectations for a -25 bp rate cut at the Fed's September meeting. Reduced chances for a Fed rate cut are bearish for precious metals, as seen in the -0.697 (-1.83%) decline in September silver (SIU25) on Tuesday.
However, fund buying of precious metals continues to support prices after gold holdings in ETFs rose to a 2-year high last Friday, and silver holdings in ETFs reached a 3-year high on Monday. The USD/JPY (^USDJPY) fell by -0.28% on Tuesday, while July building permits, a proxy for future construction, fell -2.8% m/m to a 5-year low of 1.354 million.
In summary, the US dollar outlook reflects a delicate balance of moderate economic strengths and rising political and policy risks. Market expectations of imminent Fed rate cuts weigh on the dollar by lowering interest rate advantages versus other currencies. The currency is likely to remain volatile as these factors evolve, with any significant Fed or political developments potentially tipping the balance.
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