Dollar Remains Weak on Dovish PPI Report
The dollar index (DXY00) on Thursday spent most of the day on the downside and consolidated just mildly above Wednesday’s 5-week low. The dollar index was slightly lower late Thursday afternoon.
The dollar on Thursday was undercut by the weaker-than-expected U.S. PPI report, which added to Wednesday’s CPI report in suggesting that U.S. inflation might have peaked and that the Fed might be able to limit its rate-hike ambitions.
Thursday’s July final-demand PPI report of -0.5 m/m and +9.8% y/y was weaker than market expectations of +0.2% m/m and +10.4% y/y. On a year-on-year basis, the July PPI report of +9.8% y/y was down by -1.5 points from June’s +11.3% y/y and was -1.8 points below March’s peak of +11.6% y/y.
Meanwhile, the July core PPI report of +0.2% m/m and +7.6% y/y was weaker than market expectations of +0.4% m/m and +7.7% y/y. On a year-on-year basis, the July core CPI of +7.6% y/y fell by -0.6 points from June’s +8.2% and was -2.1 points below March’s peak of +9.7% y/y.
Thursday’s PPI report provided support for ideas sparked by Wednesday’s CPI report that inflation may have already peaked. The July CPI on Wednesday fell by -0.6 points to +8.5% y/y from June’s 40-year peak of +9.1%. The July core CPI was unchanged from June at +5.9% y/y and remained -0.6 points below the 40-year peak of +6.5% y/y posted earlier this year in March.
The CPI report caused short-term T-note yields to fall Wednesday and caused market participants to mildly reduce their expectations for Fed tightening in the coming months. The market is now discounting a 100% chance of a +50 bp rate hike at the next FOMC meeting on September 20-21 and about a 50-50 chance of a +75 bp rate hike.
Thursday’s initial unemployment claims report was also bearish for the dollar. U.S. weekly initial unemployment claims in the week ended Aug 6 rose by +14,000 to 262,000, which showed a slightly stronger labor market than expectations for a rise to 265,000. Nevertheless, initial claims rose to a 9-month high, raising concerns about rising layoffs and a weaker U.S. labor market.
EUR/USD (^EURUSD) on Thursday rose by +0.18%, while USD/JPY (^USDJPY) fell -0.76%.
October gold (GCV22) on Thursday closed down -6.50 (-0.36%), and September silver (SIU22) closed down -0.393 (-1.89%). Gold and silver on Thursday suffered from some technical fatigue after the rally seen in the past several weeks. Precious metals were also undercut by the +11 bp rise in the 10-year T-note yield. Precious metals saw underling support from the continued weakness seen in the dollar.
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