The dollar index (DXY00) on Tuesday fell by -0.08%. The dollar gave up modest gains on Tuesday and turned lower as T-note yields fell following dovish comments from Fed Governor Michelle Bowman, who stated that policymakers are in danger of falling behind the curve and need to act decisively to lower interest rates as the labor market weakens. Tuesday’s weaker-than-expected reports on the September S&P manufacturing PMI and the September Richmond Fed manufacturing sentiment survey also weighed on the dollar.
The dollar initially moved higher on Tuesday after the US Q2 current account deficit came in smaller than expected, a supportive factor for the dollar. Also, comments from Fed Chair Powell were neutral for the dollar as he offered no hints on whether he would support a rate cut at next month’s FOMC meeting.
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The dollar is being undercut by concerns over Fed independence, which could prompt foreign investors to dump dollar assets as President Trump attempts to fire Fed Governor Cook, and by Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors.
The US Q2 current account balance was -$251.3 billion, a smaller deficit than expectations of -$256.6 billion.
The US Sep S&P manufacturing PMI fell -1.0 to 52.0, weaker than expectations of 52.2.
The US Sep Richmond Fed manufacturing sentiment survey unexpectedly fell -10 to -17, versus expectations of an increase to -5.
Fed Chair Powell said, "Near-term risks to inflation are tilted to the upside and risks to employment to the downside, a challenging situation. Two-sided risks mean that there is no risk-free path" on Fed policy.
Chicago Fed President Austan Goolsbee said the Fed is mildly restrictive and the neutral policy rate is 100-125 basis points below the current rate.
Fed Governor Michelle Bowman said, "Now that we have seen many months of deteriorating labor market conditions, it is time for the FOMC to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility."
The markets are now pricing in a 91% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.
EUR/USD (^EURUSD) on Tuesday rose by +0.05%. The euro posted modest gains on Tuesday, driven by weakness in the dollar. The euro also garnered support after the Eurozone Sep S&P composite PMI expanded at its strongest pace in 16 months. Gains in the euro were limited after the Eurozone Sep S&P manufacturing PMI fell more than expected.
The euro also has support from central bank divergence, as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates by roughly two more times by the end of this year.
The Eurozone Sep S&P manufacturing PMI fell -1.2 to 49.5, weaker than expectations of no change at 50.7. The Sep S&P composite PMI rose +0.2 to 51.2, stronger than expectations of 51.1 and the strongest pace of expansion in 16 months.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) on Tuesday fell by -0.09%. The yen posted modest gains on Tuesday due to dollar weakness. Also, lower T-note yields on Tuesday were supportive of the yen. Trading activity in the yen was significantly below normal on Tuesday, as markets in Japan were closed for the Autumnal Equinox Day holiday.
December gold (GCZ25) on Tuesday closed up +40.60 (+1.08%), and December silver (SIZ25) closed up +0.394 (+0.89%). Precious metal prices rallied for a second day on Tuesday, with Dec gold posting a contract high and nearest-futures (U25) gold posting a new record high of $3,786.0 a troy ounce. Also, Dec silver climbed to a contract high, and nearest-futures (U25) posted a 14-year high.
Dovish comments from Fed Governor Michelle Bowman on Tuesday knocked T-note yields lower and the dollar lower and were bullish for precious metals, as she stated that policymakers are in danger of falling behind the curve and need to act decisively to lower interest rates as the labor market weakens. Also, the outlook for the Fed to keep cutting interest rates has boosted demand for precious metals as a store of value. In addition, gold prices garnered support Tuesday after Bloomberg reported that China's central bank, the PBOC, is attempting to become custodian of foreign sovereign gold reserves as it courts central banks in friendly countries to buy bullion and store it within China.
Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs and President Trump's attacks on Fed independence, as he attempts to fire Fed Governor Cook. Additionally, Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors contributes to this uncertainty. Finally, geopolitical risks and global trade tensions have boosted safe-haven demand for precious metals.
Precious metals prices continue to receive support from fund buying of precious metal ETFs. Gold holdings in ETFs rose to a nearly 3-year high on Monday, and silver holdings in ETFs rose to a 3-year high on the same day.
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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