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Strength in the U.S. CPI Report Boosts the Dollar

Barchart - Wed Sep 13, 3:06PM CDT

The dollar index (DXY00) Wednesday rose by +0.08%.  The dollar on Wednesday garnered support from the stronger-than-expected U.S. Aug CPI report, which is hawkish for Fed policy.   Weakness in stocks on Wednesday also boosted the liquidity demand for the dollar.  Gains in the dollar were limited by lower T-note yields.

U.S. Aug CPI increased to +3.7% y/y from +3.2% y/y in July, stronger than expectations of +3.6% y/y. However, Aug CPI ex-food and energy eased to +4.3% y/y from +4.7% y/y in July, right on expectations and the slowest pace of increase in almost two years.

EUR/USD (^EURUSD) Wednesday fell by -0.22%.  Weaker-than-expected Eurozone economic news Wednesday weighed on the euro after Eurozone Jul industrial production fell more than expected. Losses in the euro were limited after the odds for a 25 bp rate hike by the ECB on Thursday rose to 65% Wednesday from 46% on Tuesday after Reuters reported the ECB’s inflation projections, to be released Thursday, will remain above 3% for 2024, bolstering the cast for more hawkish ECB policy.

Eurozone Jul industrial production fell -1.1% m/m, weaker than expectations of -0.9% m/m and the biggest decline in 4 months.

Reuters reported that the ECB's new economic estimates, due to be released Thursday, will show a Eurozone inflation forecast for 2024 above 3%.

USD/JPY (^USDJPY) Wednesday rose by +0.26%.  The yen on Wednesday posted moderate losses.  Central bank divergence is weighing on the yen, with the ECB and Federal Reserve raising interest rates while the BOJ maintains record-low interest rates.

Wednesday’s Japanese economic news was mixed for the yen.  On the negative side, Japan's Aug PPI eased to +3.2% y/y from +3.4% y/y in July, better than expectations of +3.3% y/y and dovish for BOJ policy. Conversely, the Q3 BSI large manufacturing business conditions rose +5.8 to 5.4, the highest since Q4 of 2021.

October gold (GCV3) Wednesday closed -2.80 (-0.15%), and December silver (SIZ23) closed -0.221 (-0.948%).  Precious metals prices on Wednesday finished moderately lower, with gold falling to a 3-week low and silver dropping to a 3-1/2 week low.  Increased expectations for a 25 bp rate hike by the ECB Thursday undercut precious metals as the odds for an ECB rate hike rose to 65% Wednesday from 46% Tuesday after Reuters reported the ECB’s new economic projections will show inflation remaining above 3% in 2024, bolstering the case for tighter ECB policy.

Also, a stronger dollar on Wednesday weighed on precious metals.  In addition, the continued liquidation of gold holdings by funds is bearish for gold after long gold holdings in ETFs fell to a 3-1/3 year low Tuesday.  On the positive side, increased inflation expectations boosted demand for precious metals as an inflation hedge after the U.S. 10-year breakeven inflation rate climbed to a 4-week high Wednesday of 2.371%. 

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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.