Dollar Undercut by Yen Strength and Speculation of a 50 bp Fed Rate Cut

The dollar index (DXY00) today is down by -0.39% and posted a 1-week low.  Strength in the yen is undercutting the dollar as the yen rose to a 13-month high against the dollar today.  Also, heightened speculation that the Fed will cut the fed funds target range by 50 bp after the Tue/Wed FOMC meeting is weighing on the dollar. Swap markets show the chances of a 50 bp rate cut rose to 60% from 52% last Friday.  A supportive factor for the dollar was today’s US Sep Empire manufacturing survey, which showed that general business conditions rose more than expected to a 2-1/3 year high. 

The US Sep Empire manufacturing survey general business conditions index rose +16.2 to a 2-1/3 year high of 11.5, stronger than expectations of -4.0.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 60% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) today is up by +0.45% and climbed to a 1-week high. A weaker dollar today is boosting the euro.  Also, hawkish comments today from ECB Governing Council member Kazaks gave the euro a boost when he said, "There's still more risk inflation will be higher over the medium term than we expect."

ECB Governing Council member Kazaks said, "there's still more risk inflation will be higher over the medium term than we expect," and the ECB "will almost surely need to wait until December for a clearer picture before making its next move" on interest rates.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 30% for the October 17 meeting and at 100% for that 25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) today is down by -0.22%.  The yen rallied to a 13-month high against the dollar today.  The yen is climbing due to central bank divergence as the Fed is expected to begin cutting interest rates this week while the BOJ is expected to keep raising rates. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +15% for the October 30-31 meeting.

December gold (GCZ24) today is down -3.00 (-0115%), and December silver (SIZ24) is up +0.071 (+0.23%).  Precious metals today are mixed, with silver posting a 2-month high.  Today’s decline in the dollar index to a 1-week low supported metals prices.  Also, heightened speculation the Fed will cut interest rates by 50 bp at the Tue/Wed FOMC meeting is boosting demand for precious metals as a store of value as the swap markets boosted the chance for a 50 bp rate cut this week to 69% from 52% last Friday.  In addition, fund buying of gold supported gold prices as long gold positions in ETFs rose to a 7-month high last Friday.

Gold prices fell back from a contract high and turned lower after today’s news that the US Sep Empire manufacturing survey general business conditions index rose more than expected to a 2-1/3 year high, a hawkish factor for Fed policy.  Silver prices were also undercut after China Aug industrial production rose less than expected, a bearish factor for industrial metals demand.

More Forex News from Barchart

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

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.