Dollar Firms on Rising T-Note Yields and Crude Prices

On Tuesday, the dollar index (DXY00) increased by 0.27%. Soaring Treasury yields bolstered the dollar's interest rate differentials, driving its strength. Additionally, a 5% surge in WTI crude oil to a six-week high raised inflation expectations, potentially prompting the Fed to raise rates, which also supports the dollar. Conversely, Tuesday's stock market decline boosted demand for dollars.

However, the dollar's gains were curtailed by weaker-than-anticipated U.S. economic data, including the August ISM manufacturing index falling to 54.6, below expectations of 55.2. The August ISM prices paid sub-index remained unchanged at 71.1, stronger than the anticipated decline to 70.8. U.S. July construction spending declined 0.5% month-over-month, less than the expected no change.

The July JOLTS job openings unexpectedly rose by 89,000 to 7.271 million, lower than the revised 7.182 million in June, missing expectations of 7.313 million. Fed Governor Michael Barr's hawkish comments today further supported the dollar by stating, "If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise interest rates."

Markets are discounting a 69% probability of a 25 basis point rate hike at the upcoming FOMC meeting on September 15-16. The EUR/USD (^EURUSD) fell by 0.24% on Tuesday due to a stronger dollar. Euro losses were limited by crude oil's 5% rally to a six-week high, raising inflation expectations and potentially nudging the ECB to tighten monetary policy, a favorable factor for the euro.

ECB Governing Council member Martin Kocher's hawkish remarks also supported the euro as he suggested an interest rate hike may be necessary if the inflation outlook worsens. Additionally, the Eurozone August CPI rose by the most in nearly three years, which is bullish for the ECB and positive for the euro. The Eurozone August S&P manufacturing PMI was revised downward by 0.1 to 52.7, compared to the previously reported 52.8.

German July retail sales unexpectedly declined by 3.4% month-over-month, worse than the expected 0.5% rise and marking the biggest decline in five years. The UK Aug S&P manufacturing PMI was revised upward by 0.3 to 51.7, compared to the previously reported 51.5. ECB Governing Council member Martin Kocher stated, "Upside risks to inflation have increased again recently.

If this picture is confirmed in the ECB's new forecast, I believe another interest rate hike will be necessary in the near future." The markets are betting a 99% chance of a 25 basis point ECB rate hike at its next policy meeting on September 10. USD/JPY (^USDJPY) surged by 0.28% on Tuesday. The yen plummeted to a one-month low against the dollar on Tuesday.

Soaring T-note yields weighed on the yen, and crude oil's 5% surge to a six-week high negatively impacted the Japanese economy and the yen, as Japan imports over 90% of its energy. Yen losses were limited after Japanese economic data showed the August consumer confidence index rose more than expected to a six-month high, and Q2 capital spending increased more than expected.

The yen continues to be supported by increasing expectations of a BOJ rate hike in September or October due to its current policy rate of 1.00%, which is significantly below the Fed's federal funds rate target range of 3.50%-3.75%.