Dollar Gains as Crude Oil Prices and T-Note Yields Surge
Pile of money by Atlantagreg via iStock The dollar index (DXY00) rose by +0.26% on Thursday. The dollar moved higher on Thursday amid the +6% surge in WTI crude oil to a 3.5-month high, which boosted inflation expectations and could persuade the Fed to raise interest rates. Also, Thursday’s jump in T-note yields strengthened the…
The dollar index (DXY00) rose by +0.26% on Thursday. The dollar moved higher on Thursday amid the +6% surge in WTI crude oil to a 3.5-month high, which boosted inflation expectations and could persuade the Fed to raise interest rates. Also, Thursday’s jump in T-note yields strengthened the dollar’s interest rate differentials. In addition, falling stocks on Thursday boosted liquidity demand for the dollar.
Thursday’s US economic news also supported the dollar, with stable weekly jobless claims and stronger-than-expected Aug PPI. The dollar fell back from its best level after US Aug existing home sales fell to a 14-month low.
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US weekly initial unemployment claims fell -1,000 to 206,000, close to expectations of 205,000 and signaling a stable labor market.
US Aug PPI final demand rose +5.4% y/y, stronger than expectations of +5.3% y/y. Aug PPI ex-food and energy rose +4.6% y/y, right on expectations.
US Aug existing home sales fell -2.0% m/m to a 14-month low of 3.98 million, right on expectations.
The markets are discounting a 71% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) fell by -0.20% on Thursday. The euro was under pressure Thursday from a stronger dollar. Also, Thursday’s +6% surge in crude oil prices to a 3.5-month high is negative for the Eurozone economy and the euro, as Europe imports most of its energy.
Euro losses were limited after the ECB raised interest rates by 25 bp as expected. The ECB also raised its 2026 Eurozone GDP forecast, a positive factor for the euro. In addition, Thursday’s surge in the 10-year German Bund yields to a 17-year high of 3.508% has strengthened the euro’s interest rate differentials.
The ECB, as expected, raised the deposit facility rate by +25 bp to 2.50% and said inflation will stay above 2% for an “extended period.”
The ECB raised its 2026 Eurozone GDP forecast to +0.9% from a prior forecast of +0.8% and kept its 2026 inflation ex-food and energy forecast unchanged at +2.5%.
The markets are discounting a 97% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.
USD/JPY (^USDJPY) rose by +0.53% on Thursday. The yen retreated on Thursday after the 10-year T-note yield jumped to a 2.75-year high. Also, Thursday’s +6% surge in crude oil prices to a 3.5-month high is negative for the Japanese economy and yen, as Japan imports more than 90% of its energy.
Hawkish comments on Thursday from BOJ Board member Kazuyuki Masu limited losses in the yen after he said, “The BOJ will continue to raise the policy interest rate,” given a prevailing price trend very close to 2% and financial conditions that remain accommodative. He added that “if inflation accelerates here, there is a risk that the BOJ might inevitably need to implement a rapid policy interest rate hike.”
The yen also has carryover support from Tuesday, when the Japanese health minister, who oversees the Government Pension Investment Fund (GPIF) that holds $2.1 trillion in assets, said the fund is still considering whether it needs to review its asset allocation. The recent jump in the 10-year Japanese JGB government bond yield to a 30-year high has fueled speculation that the GPIF may move to boost its allocation of Japanese government bonds, which would support the yen.
The yen also has underlying support from increased expectations of a BOJ rate hike later this month. The markets are discounting a 96% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak.
December COMEX gold (GCZ26) closed down -53.40 (-1.20%) on Thursday, and December COMEX silver (SIZ26) closed down -3.719 (-5.42%).
Precious metals sold off sharply on Thursday and fell to 1-week lows. Thursday’s stronger dollar pressured metals prices. Soaring global bond yields on Thursday also undercut precious metals prices. In addition, the ECB’s +25 bp rate hike on Thursday weighed on precious metals prices. Finally, Thursday’s +6% surge in crude oil to a 3.5-month high is boosting inflation expectations and could potentially persuade the world’s central banks to tighten monetary policy, a bearish factor for precious metals.
Precious metals had some safe-haven support on Thursday from weakness in stocks. Also, concerns about dollar debasement are boosting demand for precious metals as a store of value after the US Treasury announced it will buy back $6 billion of long-term US Treasuries on Thursday.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 5.75-month high last Thursday. Long holdings in silver ETFs also rose to a 5.5-month high on August 25.
Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China’s PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first consecutive month the PBOC boosted its gold reserves.
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. This article was originally published on Barchart.com
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