Dollar Strengthens on Hawkish Fed Comments

Rich Asplund -Barchart - 43 minutes ago

The dollar index (DXY00) on Thursday rose by +0.19%. The dollar index Thursday rallied to a 1-month high. Hawkish Fed comments Thursday signal the Fed will continue to be aggressive in tightening monetary policy to combat inflation, which is bullish for the dollar. San Francisco Fed President Daly said the FOMC "might need to go above" a neutral rate of +3% to cool inflation that is too high, and St. Louis Fed President Bullard said he backed another 75 bp rate hike at the September FOMC meeting.

Thursday’s U.S economic data was mixed for the dollar. On the bullish side, weekly initial unemployment claims unexpectedly fell -2,000 to 250,000, showing a stronger labor market than expectations of an increase to 264,000. Also, the Aug Philadelphia Fed business outlook survey rose +18.5 to a 4-month high of 6.2, stronger than expectations of -5.0. On the negative side, July existing home sales fell -5.9% m/m to a 2-year low of 4.81 million, weaker than expectations of 4.86 million.

Hawkish Fed comments Thursday were supportive of the dollar. St. Louis Fed President Bullard said he backed another 75 bp rate hike at the September FOMC meeting, saying, "we should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation." Also, San Francisco Fed President Daly said the FOMC "might need to go above" a neutral rate of +3% to cool inflation that is too high and that either a 50 bp or 75 bp rate hike at the September FOMC meeting was reasonable.

EUR/USD (^EURUSD) on Thursday fell by -0.82% and dropped to a 1-month low. Dollar strength Thursday weighed on the euro along with weak Eurozone economic data after Eurozone June construction output posted its biggest decline in 11 months. Also, concern that the ongoing energy crisis in Europe will throw the Eurozone economy into recession is bearish for EUR/USD. Nat-gas prices are about eleven times higher than they usually are for this time of year and are hurting commodity-reliant industries that are buckling under soaring energy costs. The euro retreated Thursday despite hawkish ECB comments.

Eurozone June construction output fell -1.3% m/m, the biggest decline in 11 months.

Comments from ECB Executive Board member Schnabel signal she favors at least another 50 bp rate hike by the ECB at its September meeting when she said the inflation outlook hasn't improved since the ECB raised interest rates by 50 bp in July. For September's ECB meeting, she said, "any decision is going to be taken on the basis of incoming data. However, if I look at the recent data, I would say that the concerns we had in July have not been alleviated."

ECB Governing Council member Kazaks said, "inflation at the moment is too high, and the ECB will continue to hike rates to slow inflation."

USD/JPY (^USDJPY) on Thursday rose +0.62% and fell to a 3-week low. Hawkish Fed comments Thursday highlighted the divergence of central bank policies between the Fed and BOJ and weighed on the yen. The Fed is in the middle of a rate-hiking cycle while the BOJ maintains QE and record-low interest rates and shows no inclination toward tightening monetary policy.

October gold (GCV22) Thursday closed down -5.40 (-0.31%), and September silver (SIU22) closed down -0.3267(-1.35%). Precious metals Thursday moved lower for the fourth consecutive session and fell to a 3-week low. A rally in the dollar index Thursday to a 1-month high undercut metals prices. Also, hawkish Fed comments Thursday signal the Fed may continue with its aggressive rate hike plan, which is bearish for metals. In addition, the ongoing liquidation of long gold positions by funds is bearish for gold prices after long gold positions in ETFs fell to a 5-1/2 month low Wednesday.

https://www.barchart.com/story/news/9760003/dollar-strengthens-on-hawkish-fed-comments