Dollar Slips on Dovish Bessent Comments

USD/JPY (^USDJPY) fell by -0.19% on Monday.  The yen moved higher Monday on signs of strength in Japan’s economy after July industrial production unexpectedly rose, and July retail sales posted their largest increase in 6 months. 

Gains in the yen were limited, with Monday’s +2% jump in crude oil prices to a 1-week high, which is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  Today’s higher T-note yields are also bearish for the yen.

The yen also 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%.

The yen has underlying support from increased expectations of 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 an 84% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 

Japan July industrial production unexpectedly rose +0.1% m/m, stronger than expectations of -0.7% m/m.

Japan July retail sales rose +2.4% m/m, stronger than expectations of +1.6% m/m and the biggest increase in 6 months.

October COMEX gold (GCV26) closed down -47.90 (-1.07%) on Monday, and September COMEX silver (SIU26) closed down -0.774 (-1.16%).

Precious metals extended last Friday’s sharp losses on Monday, with gold falling to a 1.5-week low and silver dropping to a 1-week low.  Higher global bond yields on Monday were bearish for precious metals.  Also, Monday’s +2% jump in crude oil prices to a 1-week high boosted inflation expectations and could persuade the world’s central banks to raise interest rates, a negative factor for precious metals.  Finally, precious metals are being weighed down by negative carryover from last Friday when hawkish comments from Fed Chair Warsh boosted the chance of a Fed rate hike at next month’s FOMC meeting to 65% from 36% before he spoke. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-month high last Friday.  Long holdings in silver ETFs also rose to a 5-month high last Tuesday.

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