Dollar Slumps and Gold Rallies as US Treasury Ramps Up Buybacks

The dollar index (DXY00) tumbled to a 2.5-month low today and is down by -0.76%.  The dollar retreated today after the US Treasury boosted liquidity and announced plans to increase buybacks of long-dated bonds.  Lower T-note yields today have also weakened the dollar‘s interest rate differentials. 

The US Treasury announced today that it will at least double the maximum size of its liquidity support buyback operations for longer-dated nominal coupon sizes to at least $4 billion per operation, effective September 9. 

Join 200K+ Subscribers:
Find out why the midday Barchart Brief newsletter is a must-read for thousands daily.

The markets are discounting a 35% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) rallied to a 2.5-month high today and is up by +0.77%.  Today’s slump in the dollar is boosting the euro after the US Treasury announced that it was boosting liquidity by increasing its purchases of longer-dated US government bonds.  Today’s rally in crude oil prices to a 3-week high is bearish for the Eurozone economy and the euro, as Europe imports most of its energy. 

The markets are discounting a 95% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is down by -0.83% today.  The yen rallied to a 1-week high today against the dollar after the US Treasury announced that it was boosting purchases of longer-dated US government bonds.  The yen also found support after today’s economic news showed that Japanese June core machine orders rose more than expected.  In addition, lower T-note yields today support the yen.  On the negative side, today’s rally in WTI crude oil to a 3-week high is a bearish factor for Japan’s economy and the yen, as Japan imports more than 90% of its energy. 

The yen has underlying support from increased expectations of a BOJ rate hike after Bloomberg reported last Thursday that Japanese Prime Minister Sanae Takaichi’s government supports a BOJ rate hike in either September or October.  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.

The markets are discounting a 77% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. The yen continues to suffer from weak interest rate differentials, with the BOJ’s current policy rate of 1.00% well below the Fed’s federal funds rate target range of 3.50%-3.75%.

October COMEX gold (GCV26) is up +109.40 (+2.09%) today, and September COMEX silver (SIU26) is up +1.403 (+2.19%).

Precious metals prices are sharply higher today, with gold soaring to a 2.5-month high.  Today’s slump in the dollar index to a 2.5-month low is bullish for precious metals.  Also, today’s action by the US Treasury to boost its buybacks of longer-dated US government bonds has increased demand for precious metals as a store of value.  In addition, lower global bond yields today support precious metals.  On the negative side, today’s rally in crude oil prices to 3-week highs boosts inflation expectations that may persuade the world’s central banks to tighten their monetary policies, a bearish factor for precious metals.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10.25-month low on July 27, after reaching a 3.5-year high on February 27.  Long holdings in silver ETFs also fell to a 1-year low on July 14 from the 3.5-year high posted on December 23.

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,

here.

More news from Barchart