Dollar Index Reverses After Weak US Data

The dollar index DXY finished Friday down 0.03% after touching a seven-week high. This reversal followed the release of weak US economic data. August manufacturing production fell 0.3% month-over-month. This was the largest drop in ten months. Economists had expected a 0.3% increase. August leading indicators also declined 0.1%. This marked the first drop in five months. Market consensus had projected a 0.1% rise.

Traders adjusted their expectations for Federal Reserve policy in response. The market now prices in a 55% probability of a 25 basis point rate hike at the next FOMC meeting. That meeting is scheduled for October 27-28. The initial dollar strength came from yen weakness and higher US Treasury yields. The yen hit a two-week low against the greenback. This occurred despite the Bank of Japan raising its rate by 25 basis points. Two BOJ members dissented against the move. Higher US bond yields also weighed on the yen initially.

Japanese Currency Weakens Despite Hike

Japan’s August national CPI rose 1.9% year-over-year. This figure was unchanged from July and below the expected 2.0%. Core CPI, excluding fresh food and energy, also held at 1.9%. The data signaled a slower pace of inflation. The BOJ raised its overnight call rate to 1.25% from 1.00% in a 7-2 vote. Governor Kazuo Ueda stated the bank intends to continue raising rates. The market sees an 18% chance of another hike on October 30. The yen recovered some ground after crude oil prices fell 1%.

Precious Metals Rally On Soft Dollar

December COMEX gold closed up 25.20 dollars, or 0.57%. Silver rose 1.054 dollars, a 1.59% gain. Both metals hit one-week highs during the session. Short covering emerged as the dollar index turned lower. The 1% drop in WTI crude oil also supported metals prices. Lower oil prices ease inflation concerns. This may prompt central banks to ease monetary policy. Gold ETF long holdings climbed to a 6.5-month high. Silver ETF long holdings reached a 5.5-month high on August 25.

Central Banks Boost Gold Reserves

China’s central bank added 650,000 ounces to its gold reserves in August. Total holdings reached 76.73 million troy ounces. This was the largest single-month increase in three years. It marked the 22nd consecutive month of buying. Strong institutional demand underpins the recent price strength in precious metals. The combination of weak dollar momentum and robust central bank accumulation supports the sector. Analysts note that continued reserve accumulation signals long-term confidence in gold as a store of value.