The U.S. dollar index (DXY00) fell to a 7-week low on Monday before staging a near-complete recovery driven by stronger-than-expected American manufacturing data.
The U.S. July ISM manufacturing index climbed by 2.3 points to 55.6, exceeding analyst expectations of 53.9 and marking the fastest pace of expansion in four years.
Early dollar weakness was driven by easing geopolitical tensions in the Middle East, which boosted equity markets and reduced safe-haven demand for the greenback.
A sharp 5% single-session decline in WTI crude oil prices also weighed on the dollar by lowering inflation expectations and raising the prospect of looser Federal Reserve monetary policy.
New York Fed President John Williams added further downward pressure on the dollar, saying interest rates remain well positioned and that inflation should ease during the second half of the year.
U.S. June construction spending unexpectedly fell 0.1% month-on-month, missing expectations of a 0.2% increase and adding to a mixed picture of the broader American economy.
Markets are currently pricing in a 67% probability of a 25 basis point rate hike at the next FOMC meeting scheduled for September 15-16.
EUR/USD (^EURUSD) fell 0.12% on the session after the euro retreated from a 1.5-month high, pressured by the dollar’s recovery and weaker-than-expected Eurozone economic data.
The Eurozone July S&P manufacturing PMI was revised downward by 0.1 to 51.9, while German June retail sales fell 1.1% month-on-month, the steepest decline in 13 months, against expectations of a 0.3% drop.
Markets are discounting an 88% probability of a 25 basis point European Central Bank rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) fell 0.35% as the yen rallied to a 2.75-month high after the U.S. and Japan issued warnings of further coordinated intervention to support the Japanese currency.
Japan’s Ministry of Finance confirmed it conducted a yen-buying operation on July 31 in coordination with the U.S. Treasury, stating it would not hesitate to conduct further intervention.
Japan’s July S&P manufacturing PMI was revised down by 0.2 to 54.5, while markets are pricing in only a 50% chance of a 25 basis point Bank of Japan rate hike at the September 18 policy meeting.
The BOJ’s current policy rate of 1.00% remains well below the Federal Reserve’s federal funds rate target of 3.50% to 3.75%, continuing to weigh on the yen through interest rate differentials.
October COMEX gold (GCV26) closed down $16.30, or 0.40%, while September COMEX silver (SIU26) edged up $0.070, or 0.12%, leaving precious metals prices mixed for the session.
Gold surrendered overnight gains as stocks surged following reports that President Trump called off a planned attack on Iran, while Iran indicated that negotiations over Strait of Hormuz shipping access were making progress.
Long holdings in gold ETFs fell to a 10-month low, having previously reached a 3.5-year high on February 27, while long holdings in silver ETFs fell to a 1-year low on July 14.
Supporting gold prices, bullion held in China’s PBOC reserves rose by 480,000 ounces to 75.44 million troy ounces in June, marking the twentieth consecutive month the central bank increased its gold holdings.
