The dollar index (DXY00) fell by -0.28% on Monday. The dollar settled lower on Monday, consolidating below last Friday's 2-week high. Comments from US Treasury Secretary Bessent weighed on the dollar Monday when he said the Fed traditionally doesn't raise interest rates in response to a supply shock, suggesting a possible conflict with Fed Chair Warsh. Monday's rally in the Chinese yuan to a 3.5-year high also undercut the dollar.
However, losses in the dollar were limited on Monday as WTI crude oil rallied more than +2% to a 1-week high, which raised inflation expectations and could potentially persuade the Fed to raise interest rates, a supportive factor for the dollar. Also, weaker stocks on Monday boosted some liquidity demand for the dollar, and higher T-note yields have strengthened the dollar's interest rate differentials. Finally, the dollar has some carryover support from last Friday, when Fed Chair Warsh warned inflation isn't meaningfully slowing and vowed that policymakers will return inflation to their 2% target. The chance of a Fed rate hike at next month's FOMC meeting rose to 65% on Monday from 36% before Warsh's speech.
Chinese economic news was mixed after China's Aug manufacturing PMI rose +0.6 to 49.8, stronger than expectations of 49.5. However, the Aug non-manufacturing PMI was unchanged at 49.0, weaker than expectations of an increase to 49.4.
The markets are discounting a 65% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) rose by +0.29% on Monday. The euro moved higher on Monday amid weakness in the dollar. However, gains in the euro were limited after German Aug consumer prices rose less than expected, a dovish factor for ECB policy. Also, Monday's +2% jump in crude oil prices raises inflation expectations and could prompt the ECB to tighten monetary policy, a supportive factor for the euro. In addition, Monday's increase in the 10-year German Bund yield to a 15-year high of 3.327% strengthens the euro's interest rate differentials.
German Aug CPI (EU harmonized) rose +0.2% m/m and +2.9% y/y, weaker than expectations of +0.3% m/m and +3.1% y/y.
The markets are discounting a 99% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) fell by -0.19% on Monday. The yen moved higher Monday on signs of strength in Japan's economy after July industrial production unexpectedly rose, and July retail sales posted their largest increase in 6 months.
Gains in the yen were limited, with Monday's +2% jump in crude oil prices to a 1-week high, which is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy. Today's higher T-note yields are also bearish for the yen.
The yen also continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00%, well below the Fed's federal funds rate target range of 3.50%-3.75%.
The yen has underlying support from increased expectations of a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. The markets are discounting an 84% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.
Japan July industrial production unexpectedly rose +0.1% m/m, stronger than expectations of -0.7% m/m.
Japan July retail sales rose +2.4% m/m, stronger than expectations of +1.6% m/m and the biggest increase in 6 months.
October COMEX gold (GCV26) closed down -47.90 (-1.07%) on Monday, and September COMEX silver (SIU26) closed down -0.774 (-1.16%).
Precious metals extended last Friday's sharp losses on Monday, with gold falling to a 1.5-week low and silver dropping to a 1-week low. Higher global bond yields on Monday were bearish for precious metals. Also, Monday's +2% jump in crude oil prices to a 1-week high boosted inflation expectations and could persuade the world's central banks to raise interest rates, a negative factor for precious metals. Finally, precious metals are being weighed down by negative carryover from last Friday when hawkish comments from Fed Chair Warsh boosted the chance of a Fed rate hike at next month's FOMC meeting to 65% from 36% before he spoke.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-month high last Friday. Long holdings in silver ETFs also rose to a 5-month high last Tuesday.
Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China's PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first consecutive month the PBOC boosted its gold reserves.
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. This article was originally published on Barchart.com
Facts Only
* The dollar index (DXY00) fell by -0.28% on Monday.
* US Treasury Secretary Bessent commented that the Fed traditionally does not raise interest rates in response to a supply shock, suggesting a conflict with Fed Chair Warsh.
* The Chinese yuan rallied to a 3.5-year high, which undercut the dollar.
* WTI crude oil rallied more than +2% to a 1-week high.
* Weaker stocks boosted some liquidity demand for the dollar.
* Higher T-note yields strengthened the dollar's interest rate differentials.
* The dollar had carryover support from Friday due to Fed Chair Warsh's comments on inflation.
* The chance of a Fed rate hike at the next FOMC meeting rose to 65% on Monday from 36% before Warsh's speech.
* EUR/USD rose by +0.29% on Monday amid dollar weakness.
* German August Consumer Prices (EU harmonized) rose +0.2% m/m and +2.9% y/y, weaker than expected (+0.3% m/m and +3.1% y/y).
* The markets are discounting a 99% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
* USD/JPY fell by -0.19% on Monday.
* Japan's July industrial production unexpectedly rose +0.1% m/m, stronger than expectations of -0.7% m/m.
* Japan's July retail sales rose +2.4% m/m, stronger than expectations of +1.6% m/m.
* October COMEX gold (GCV26) closed down -47.90 (-1.07%) on Monday.
* September COMEX silver (SIU26) closed down -0.774 (-1.16%) on Monday.
Executive Summary
The dollar index fell by -0.28% on Monday, settling below last Friday's 2-week high. This movement was influenced by comments from US Treasury Secretary Bessent regarding the Fed's stance on interest rate hikes and a rally in the Chinese yuan to a 3.5-year high. Losses were limited because WTI crude oil rallied over +2% to a 1-week high, which raised inflation expectations and offered support for the dollar as it could persuade the Fed to raise rates. Other factors supporting the dollar included weaker stocks boosting liquidity demand and higher T-note yields strengthening interest rate differentials. Carryover support from Friday stemmed from Fed Chair Warsh's warning about inflation and the increased probability of a Fed rate hike at the next FOMC meeting, which rose to 65% on Monday.
The euro gained +0.29% amid dollar weakness, though gains were tempered by weaker-than-expected German consumer prices and the possibility of the ECB tightening policy due to rising oil prices. Meanwhile, the yen strengthened by -0.19% due to signs of Japanese economic strength in industrial production and retail sales. Yen gains were somewhat limited by higher interest rate differentials with the US and Japan, as well as the impact of rising oil prices on energy-importing Japan. Precious metals, gold and silver, declined, pressured by higher global bond yields and inflation expectations that could prompt central banks to raise rates.
Full Take
The market dynamics reveal a tension between macroeconomic uncertainties and immediate commodity-driven shifts. The dollar's movement was pulled in opposing directions: downward pressure from monetary uncertainty (Treasury comments) and upward support from inflation-linked commodities and yield differentials. This suggests that the strength of the USD is highly sensitive to perceived future Federal Reserve policy, more so than current economic data alone.
The currency movements illustrate how diverging central bank policy expectations interact with external factors. The euro's performance was tied to disappointing German inflation figures juxtaposed against rising energy costs, creating a complex environment for ECB policy consideration. Conversely, the yen benefited from domestic Japanese strength, though it remains constrained by the significant interest rate gap with the US and structural energy import dependencies.
The precious metals experience reflects this overarching theme: risk aversion tied to real yields (higher bond yields being bearish) is countered by inflationary risks promoted by oil prices. The market's discounting of Fed and ECB rate hikes suggests a focus on managing the probability of future policy shifts rather than current outcomes. The pattern suggests that investor sentiment for currencies and commodities is driven by the perceived trajectory of monetary policy responses, where geopolitical or commodity supply shocks act as amplifiers for those existing risks. What assumptions about the Fed's reaction to supply shocks versus its stated mandate, and the ECB's response to energy prices, are most frequently ignored when synthesizing these simultaneous, seemingly contradictory signals?
Sentinel — Human
This text is a professionally structured market update that effectively synthesizes disparate economic data points, exhibiting characteristics of high-quality human financial journalism rather than raw AI generation.