The dollar index (DXY00) today is up by +0.37%. Today’s weakness in stocks is boosting liquidity demand for the dollar. Also, higher T-note yields today are supportive of the dollar. In addition, today’s slump in the yen to a 1-month low on political risks in Japan is bullish for the dollar on a report that Liberal Democratic Party Secretary-General Moriyama intends to step down.
The dollar fell back from its best level after today’s economic reports showed the Aug ISM manufacturing index rose less than expected and July construction spending declined for the third consecutive month.
Concerns over the Fed’s independence and fears about capital flight are negative for the dollar, particularly following President Trump’s move to fire Fed Governor Lisa Cook. If Mr. Trump succeeds in firing Fed Governor Cook, foreign investors may lose faith in the Fed and the dollar and swap their dollar assets into non-dollar investments.
The US Aug ISM manufacturing index rose +0.7 to 48.7, weaker than expectations of 49.0. The Aug ISM price paid sub-index unexpectedly fell -1.1 to a 6-month low of 63.7, versus expectations of an increase to 65.0.
US Jul construction spending fell -0.1% m/m, right on expectations and the third consecutive month that construction spending has declined.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 92% at the September 16-17 FOMC meeting and at 51% for a second -25 bp rate cut at the following meeting on October 28-29.
EUR/USD (^EURUSD) today is down by -0.29%. The euro is under pressure today from a stronger dollar. The euro is falling despite today’s Eurozone Aug CPI report that showed Aug core CPI rose more than expected, a hawkish factor for ECB policy. Also, hawkish comments from ECB Executive Board member Schnabel pushed German bund yields higher and were supportive for the euro when she said that the ECB should cut interest rates further, with inflation risks tilted to the upside.
The Eurozone Aug CPI rose +2.1% y/y, right on expectations. The Aug core CPI rose 2.3% y/y, stronger than expectations of +2.2% y/y.
ECB Executive Board member Schnabel said the ECB should maintain borrowing costs at current levels with inflation risks tilted to the upside.
On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, which is bearish for the euro. Last Friday, German Chancellor Merz and French President Macron called for secondary sanctions on Russia for its war in Ukraine and said they will push for measures targeting “companies from third countries that support Russia’s war.” Last Thursday, German Chancellor Merz stated that a meeting between Russian President Putin and Ukrainian President Zelensky is unlikely to take place. The outcome of the Russian-Ukrainian war could have macroeconomic implications regarding tariffs and oil prices, and could, of course, have significant consequences for European security.
finance.yahoo.com
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