Dollar Gains Ground Amidst Weak Stocks and Surging Bond Yields

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The dollar index (DXY00) surged by +0.54% on Tuesday, marking a formidable 5-1/2 month high. This surge was predominantly fueled by a decline in stock markets, which instigated heightened demand for liquidity, consequently bolstering the dollar's position. Furthermore, Tuesday witnessed a surge in T-note yields, thus amplifying the dollar's appeal by augmenting interest rate differentials. Adding to the dollar's strength, Tuesday brought forth disappointing economic reports from both China and the Eurozone, effectively boosting relative optimism concerning the U.S. economy and, consequently, the dollar's stature.

The greenback found support in Tuesday's U.S. economic developments as July factory orders posted a milder-than-expected decline of -2.1% month-on-month. This decline, though the steepest in eight months, outperformed the anticipated -2.5% month-on-month drop.

However, Fed Governor Waller's remarks on Tuesday had a dovish undertone concerning Fed policy, rendering them bearish for the dollar. Waller hinted at a preference for a pause in Fed rate hikes, stating, "There is nothing that is saying we need to do anything imminent anytime soon, and we can just sit there and wait for the data."

Meanwhile, the EUR/USD (^EURUSD) pair experienced a setback on Tuesday, slipping by -0.70%. The dollar's resurgence prompted technical selling in the euro, leading to the establishment of a new 2-3/4 month low. Weaker-than-expected economic data from the Eurozone on Tuesday cast a shadow on ECB policy and weighed down the euro. Notably, the euro managed to recover from its lowest levels after the ECB's monthly survey indicated an increase in longer-term consumer price expectations, a development viewed as hawkish for ECB policy.

The Eurozone's August S&P composite PMI was revised downward by -0.3 to 46.7 from the previously reported 47.0, representing the sharpest contraction in 2-3/4 years. Moreover, Eurozone July PPI figures demonstrated a steep decline, falling to -7.6% year-on-year from -3.4% year-on-year in June, aligning with expectations and marking the most significant decline in 14 years. Nevertheless, the ECB's report indicated that July 1-year CPI consumer expectations remained unchanged at 3.4% from June, but the 3-year CPI consumer expectations unexpectedly rose to 2.4% from 2.3% in June.

Turning our attention to USD/JPY (^USDJPY), the dollar made significant gains on Tuesday, with the yen sliding to a 10-month low against its American counterpart. The yen's decline was influenced by rising T-note yields and central bank divergence, as the Federal Reserve, Bank of England, and European Central Bank are all in the process of raising interest rates, while the Bank of Japan maintains record-low rates. Additionally, Japan's economic news on Tuesday exerted further pressure on the yen, particularly the news of a more significant than expected drop in household spending.

In Japan, July household spending fell by a substantial -5.0% year-on-year, significantly below expectations of a -2.5% year-on-year decline and marking the most substantial contraction in nearly 2-1/2 years.

As for precious metals, on Tuesday, October gold (GCV3) closed at -14.10 (-0.72%), and December silver (SIZ23) concluded at -0.689 (-2.81%). These precious metals registered moderate losses as the dollar index rallied to a 5-1/2 month high, casting a bearish shadow over the metals market. Additionally, rising global bond yields on Tuesday weighed down on precious metals prices. Nonetheless, the losses incurred by precious metals were mitigated by a slump in stock markets, which fueled safe-haven demand for these assets. Furthermore, the comments made by Fed Governor Waller on Tuesday provided a bullish outlook for precious metals, as he indicated his support for a pause in Fed rate hikes.

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