The dollar index (DXY00) rose by +0.20% on Monday. The dollar moved higher on Monday amid hawkish Fed comments. Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem said the Fed may have to hike interest rates further to restore price stability. Dollar gains were limited on Monday after WTI crude oil prices plunged by more than -4%, which eased inflation expectations and could persuade the Fed to loosen monetary policy, a bearish factor for the dollar. Also, a stronger Chinese yuan undercut the dollar as the yuan climbed to a 3.5-year high on Monday.
Today's US economic news showed the Aug Chicago Fed national activity index fell -0.12 to -0.04, right on expectations.
Chicago Fed President Austan Goolsbee said that to restore price stability, the Fed may need to raise interest rates further and narrow the gap between supply and demand, which could lead to drops in employment, wages, and growth.
St. Louis Fed President Alberto Musalem said core inflation may be running 1 percentage point above the Fed's 2% target and that the Fed likely needs to hike interest rates further.
Markets are pricing in a 55% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.
EUR/USD (^EURUSD) fell by -0.18% on Monday. The dollar’s strength on Monday weighed on the euro. Also, Monday’s decline in the 10-year German Bund yield to a 1-week low of 3.442% has weakened the euro’s interest rate differentials.
However, Monday’s -4% decline in crude oil prices supports the Eurozone economy and the euro, as Europe imports most of its energy. Also, Monday’s monthly report from the Bundesbank was slightly hawkish and supportive of the euro as it projected stronger economic German growth in in Q4 with “persistently high” energy prices.
In its monthly report released on Monday, the German Bundesbank said Q3 GDP will expand only "modestly" in Q3 because of short-term drivers like low water levels in the Rhine River, but the economy is expected to grow at a "stronger" pace again in Q4 and will "remain on its current path to recovery." The Bundesbank added that "persistently high prices, not only for crude oil but also for natural gas and electricity, could amplify both direct and indirect effects and delay the return of the inflation rate to 2%."
The markets are discounting a 46% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.
USD/JPY (^USDJPY) rose by +0.38% on Monday. The dollar’s strength on Monday undercut the yen. However, Monday’s -4% decline in crude oil prices is a positive factor for Japan’s economy and the yen, as Japan imports more than 90% of its energy. Also, lower T-note yields on Monday were bullish for the yen. Moves in the yen may have been exaggerated on Monday amid below-normal trading activity, with markets in Japan closed for the Respect-for-the-Aged Day holiday.
Markets are pricing in a 19% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.
December COMEX gold (GCZ26) closed down -41.00 (-0.93%) on Monday, and December COMEX silver (SIZ26) closed down -0.734 (-1.09%).
Precious metals settled lower on Monday, pressured by a stronger dollar. A sharp rally in stocks on Monday also reduced safe-haven demand for precious metals. In addition, hawkish Fed comments on Monday undercut precious metals prices after Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem said the Fed may need to raise interest rates further to contain inflation.
Precious metals found support on Monday from a decline in global bond yields. Also, crude oil prices plunged to a 1.5-week low on Monday, easing inflation expectations, which could prompt the world’s central banks to ease their monetary policies, a bullish factor for precious metals.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.5-month high on Monday. Long holdings in silver ETFs rose to a 5.5-month high on August 25.
Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC boosted its gold reserves.
