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Dollar Moves Slightly Higher And Gold Slips On Strength In T-Note Yields

Rich Asplund - Barchart - 1 hour ago

The dollar index (DXY00) on Friday rose +0.087 (+0.09%). EUR/USD (^EURUSD) rose +0.0004 (+0.03%). USD/JPY (^USDJPY) rose +0.39 (+0.35%).

The dollar index (DXY00) on Friday moved slightly higher. Strength in T-note yields on Friday was supportive for the dollar, along with signs of expanding U.S. manufacturing activity. Gains in the dollar were limited after a rally in the S&P 500 to a new record high on Friday curbed the liquidity demand for the dollar.

EUR/USD (^EURUSD) on Friday posted modest gains on signs of economic strength in the Eurozone. The Eurozone Jul Markit composite PMI rose +1.1 to 60.6, stronger than expectations of +0.5 to 60.0 and the strongest pace of expansion in 21 years. Also, the ECB's Survey of Professional Forecasters raised their Eurozone 2021 GDP forecast to 4.7% from a prior view of 4.2%. USD/JPY (^USDJPY) rallied to a 1-week high as the yen weakened after a rally in stocks reduced the safe-haven demand for the yen. Trading activity in the yen was muted, with Japanese markets closed Friday for a holiday.

Friday’s U.S. economic data was mixed for the dollar. On the positive side, the U.S. July Markit manufacturing PMI unexpectedly rose +1.0 to 63.1, stronger than expectations of -0.1 to 62.0 and the fastest pace of expansion since the data series began in 2018. Conversely, the Jul Markit services PMI fell -4.8 to 59.8, weaker than expectations of 64.5.

August gold (GCQ21) on Friday closed down -3.60 (-0.20%), and Sep silver (SIU21) closed down -0.148 (-0.58%). A stronger dollar on Friday weighed on metals along with a rally in the S&P 500 to a new all-time high, which curbed the safe-haven demand of precious metals. Higher global bond yields on Friday were another bearish factor for precious metals as the 10-year T-note yield rose +0.8 bp to 1.286%, and the 10-year German bund yield rose +0.6 bp to -0.420%.

Dovish ECB comments on Friday were supportive for gold and negative for EUR/USD after ECB Governing Council member Villeroy said the ECB's new guidance on interest rates means it won't consider raising interest rates until its projections show inflation at the 2% target with 12 to 18 months.

The dollar and gold still have safe-haven support from concern the worldwide spread of the delta Covid variant will crimp the global economic recovery. The 7-day average of new U.S. Covid infections rose to a 2-1/2 month high Thursday of 44,057. Also, Covid infections in France more than doubled over the past week, and South Korea extended pandemic restrictions after new Covid cases rose to a record.

Big Picture Dollar Factors: Bullish factors for the dollar index include (1) the Fed's median projections for two 0.25 point rate hikes by the end of 2023, (2) the influx of capital from overseas investors fleeing from over $10 trillion of negative-yielding debt, and (3) higher T-note yields that strengthen the dollar's interest rate differentials as the 10-year T-note yield recently rose to a 1-1/4 year high of 1.774%. Bearish factors include (1) the Fed's average inflation targeting scheme that is dovish for Fed policy, (2) the outlook for the Fed to keep the Fed funds rate near zero at least through 2023, (3) the severe U.S. and global economic damage caused by the Covid pandemic, which is dovish for Fed policy, (4) trade tensions and Washington political uncertainty, (5) reduced liquidity demand for the dollar with the all-time highs in U.S. stock indexes, and (6) the wide U.S. budget and current account deficits.
Dollar Moves Slightly Higher And Gold Slips On Strength In T-Note Yields (barchart.com)