Dollar Sinks and Gold Soars to a Record on Talk of 50 bp Fed Rate Cut

The dollar index (DXY00) Friday fell to a 1-week low and finished down by -0.24%.  Dovish comments Friday from former New York Fed President Dudley knocked bond yields lower and weighed on the dollar when he said he sees “a strong case for a 50 bp cut” in interest rates at next week’s FOMC meeting.  Dudley’s comments pushed the chances for a 50 bp rate cut at next week’s FOMC meeting in the swaps market up to 53% from 17% on Wednesday. 

Strength in the yen also undercut the dollar as the yen jumped to an 8-1/2 month high against the dollar Friday.  Finally, Friday’s stock rally curbed liquidity demand for the dollar.  US economic news Friday was mixed for the dollar after the US Aug import price index ex-petroleum unexpectedly fell, and the University of Michigan’s Sep US consumer sentiment index rose to a 4-month high.

The US Aug import price index ex-petroleum unexpectedly fell -0.1% m/m, weaker than expectations of a +0.2% m/m increase.

The University of Michigan’s Sep US consumer sentiment index rose +1.1 to a 4-month high of 69.0, stronger than expectations of 68.5.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 53% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Friday rose by +0.05% and posted a 1-week high. The euro rose modestly Friday due to a weaker dollar.  The euro also found support today on comments from several ECB members who said they did not favor cutting interest rates at the October ECB meeting.

Eurozone July industrial production fell -0.3% m/m, right on expectations.

ECB President Lagarde said she is open to considering an interest rate cut in October if the Eurozone economy suffers a major setback, but a cut at the December ECB meeting is more likely since the ECB would have more comprehensive information available on the economy by then. 

ECB Governing Council member Holzmann said the October ECB meeting might not be the time for another rate cut, but there could be room for another rate cut at the December meeting.

ECB Governing Council member Kazaks said a slump in the Eurozone economy would be required for the ECB to cut interest rates at its next meeting in October.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 47% for the October 17 meeting and at 100% for that 25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Friday fell by -0.62%.  The yen Friday rallied to an 8-1/2 month high against the dollar.  The yen garnered support Friday after Japan's July industrial production was revised upward.  Also, central bank divergence supported the yen as the Fed is expected to begin cutting interest rates next week while the BOJ is expected to keep raising rates. Lower T-note yields Friday were bullish for the yen.

Japan July industrial production was revised upward by +0.3 to 3.1% m/m from the previously reported +2.8% m/m.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +11% for the October 30-31 meeting.

December gold (GCZ24) Friday closed up +30.10 (+1.17%), and December silver (SIZ24) closed up +0.967 (+3.21%).  Precious metals Friday rallied sharply, with Dec gold posting a contract high and nearest futures (U24) posting a record high of $2,581.80 an ounce.  Also, silver posted an 8-week high.  Friday’s decline in the dollar index to a 1-week low was bullish for metals.  Also, lower global bond yields on Friday were bullish for precious metals.  In addition, Friday’s comments from former New York Fed President Dudley sparked demand for gold as a store of value when he said he sees “a strong case for the Fed to cut interest rates by 50 bp” at next week’s FOMC meeting.  Finally, fund buying of gold supported gold prices as long gold positions in ETFs rose to a 7-month high Thursday. 

More Forex News from Barchart

• Stocks Push Higher on Chip Stock Strength and Positive Economic News
• Dollar Falls on Lower Bond Yields and Yen Strength
• Stocks Climb on Chip Stock Strength and Lower Bond Yields
• Dollar Edges Lower as the Euro Climbs on Hawkish ECB Rate Cut

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.