Dollar Slightly Lower on Strong Stocks and Weak Crude

On Tuesday, the dollar index (DXY00) experienced a slight decline of -0.06%, due to weak economic data and falling crude oil prices. The initial gain during the day was erased, and the index posted modest losses on July new home sales and August consumer confidence figures that were weaker than expected. Additionally, the -3% drop in WTI crude oil to a 1-week low contributed to reduced inflation expectations, a factor that favors a dovish stance in Federal Reserve policy.

Furthermore, the dollar faced reduced demand as a safe-haven currency after the New York Times reported that the US State Department is preparing to send diplomats back to embassies in the Middle East. This news indicated that the Trump administration does not expect a return to full-scale hostilities with Iran.

In contrast to the dollar's weakness, the euro (EUR/USD) gained ground on Tuesday. The euro benefited from better-than-expected Eurozone economic news, including an upward revision of Germany's Q2 GDP and a stronger-than-expected IFO business climate survey. Also, the weak crude oil prices supported Europe's energy-importing economy, which further bolstered the euro.

The US July S&P Composite-20 Home Price Index rose by 2.1% year-over-year, outperforming expectations and marking the largest increase in a year. This strong performance in the housing market added support to the dollar's decline.

While the yen (USD/JPY) faced pressure due to weak interest rate differentials and the Bank of Japan's (BOJ) ultra-loose monetary policy, it received support from lower Treasury yields and the ongoing expectation of a BOJ rate hike. Japan's economy heavily relies on energy imports, and the weak yen further benefits its trade position.

Precious metals, gold and silver, saw mixed results on Tuesday. The strength in stocks and the -3% drop in crude oil prices curbed safe-haven demand for these commodities. Moreover, the New York Times report suggesting a potential end to US hostilities with Iran and the hawkish comments from Boston Fed President Susan Collins contributed to pressure on precious metals. The markets are estimating an 80% chance of a +25 basis point rate hike from the BOJ in September, further supporting precious metal prices.