Dollar Edges Higher as Stocks Slide

On Tuesday, the dollar index (DXY00) climbed by 0.10%, bolstered by a downturn in stocks and higher WTI crude oil prices reaching a three-week peak. This rally in oil heightens inflation expectations, potentially nudging the Federal Reserve into tighter monetary policy, which is favorable for the dollar. Additionally, the 10-year Treasury yield surged to a 1.5-year high of 4.75% due to elevated demand for dollar liquidity.

However, US economic indicators on Tuesday were a mixed bag for the dollar. The US import price index (excluding petroleum) increased 0.3% month-over-month, outpacing expectations of 0.1%, while Fed rate hike anticipation decreased. US housing starts declined 12.4% month-over-month, falling short of the projected 1.345 million, while building permits rose 5.0% month-over-month to a five-month high of 1.443 million.

Manufacturing production in the US ticked up 0.2% month-over-month, hitting expectations. Pending home sales dipped 2.3% month-over-month, less than anticipated. The markets project a 35% likelihood of a 25 basis point rate hike at the upcoming FOMC meeting on September 15-16. The euro (EUR/USD) slipped 0.04% on Tuesday, pressured by the stronger dollar.

The rally in crude oil also bears on the Eurozone's economy and the euro due to Europe's heavy reliance on energy imports. German economic growth expectations in August rose more than expected to a six-month high of 34.2, buoying the euro's interest rate differentials, as the 10-year German bund yield topped a 15-year high of 3.272%.

ECB Chief Economist Philip Lane indicated that the Eurozone's consumer price growth is likely to stay above the ECB's 2% target in 2023 due to the Iran war. The markets anticipate a 95% chance of a 25 basis point ECB rate hike at the next policy meeting on September 10. Meanwhile, the yen (USD/JPY) gained 0.09% on Tuesday, hitting a two-week low against the dollar.

Higher crude oil prices are weighing on the yen as Japan imports over 90% of its energy. The yen rebounded from its lowest level on Tuesday after Treasury yields declined and benefited from higher Japanese government bond yields, which strengthened the yen's interest rate differentials. The 10-year Japan government bond yield rose to a 30-year high of 2.967%.

The yen has additional support from growing expectations of a Bank of Japan (BOJ) rate hike, as Bloomberg reported last Thursday that Prime Minister Sanae Takaichi's government backs a BOJ rate hike in either September or October. The government favors a rate hike to bolster the yen and curb inflation from the weak currency. The yen continues to struggle with low interest rate differentials, with the BOJ's policy rate at 1.00%, far below the Fed's target range of 3.50%-3.75%.

Gold and silver prices dropped on Tuesday due to a stronger dollar and rising yields, with silver reaching a one-week low. Precious metals faced bearish pressure from higher global yields and the anticipated tightening of monetary policies by central banks, which is unfavorable for precious metals. China's central bank increased its gold reserves by 640,000 ounces to 76.08 million troy ounces in July, marking the twenty-first consecutive month of reserve growth.