The dollar index (DXY00) today is little changed. The dollar is holding its own despite bearish factors that include US political uncertainty, slightly lower T-note yields, and higher stocks. The 10-year T-note yield today is down -2.1 bp at 4.217%, which undercut the dollar’s interest rate differentials.
US political uncertainty rose after President Biden dropped out of the presidential race on Sunday and endorsed Vice President Harris. The markets will be watching to see how quickly VP Harris can wrap up the nomination as the Democratic presidential candidate and how she polls against Mr. Trump once she becomes the nominee.
The recent market narrative has been that a Trump win would be bullish for the dollar because a Trump administration would likely pursue tax cuts and a stimulative fiscal policy, which would be hawkish for Fed policy and thus bullish for the dollar. However, Mr. Trump has voiced support for a weaker dollar as a stimulus measure for US exports. By contrast, a win by VP Harris would be supportive of the status quo and not specifically bullish for the dollar.
The dollar received some support after China on Monday unexpectedly cut its short-term policy rates by -10 bp, leading to a cut by large Chinese banks of their benchmark lending rates. Lower Chinese interest rates are bearish for the Chinese yuan and Asian currencies that are influenced by the yuan. The Peoples Bank of China (PBOC) on Monday cut its 7-day reverse repo rate, a key short-term policy rate, by -10 bp to 1.7%. The PBOC’s rate cut was seen as a consolation stimulus measure after China’s twice-a-decade Third Plenum last week confirmed that the Chinese government does not plan to implement a massive fiscal stimulus program to boost the weak economy. China’s 10-year government bond yield today fell by -2 bp after the PBOC’s rate cut was announced.
The markets are discounting the chances for a -25 bp rate cut at 3% for the July 30-31 FOMC meeting and 100% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) is trading slightly lower by -0.07%. The euro is being undercut by perceptions of a weaker outlook for the euro’s interest rate differentials versus the dollar after ECB President Lagarde last week warned of downside risks for the Eurozone economy.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 80% for the September 12 meeting.
USD/JPY (^USDJPY) is mildly lower by -0.35%. The yen continues to see support from fears of another round of BOJ intervention to support the yen.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 38% for the July 31 meeting and 94% for the September 20 meeting.
August gold (GCQ24) is down -10.9 (-0.45%), and September silver (SIU24) is down -0.249 (-0.85%). Precious metals prices are lower despite the stable dollar. Precious metals prices are trading lower on reduced safe-haven demand as businesses get over last Friday’s IT outage and as stocks rally. President Biden’s exit from the presidential race has had a limited impact on the markets today. Gold has underlying support after long gold holdings in ETFs rose to a 3-1/2 month high last Thursday.
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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. For more information please view the Barchart Disclosure Policy here.
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