U.S. Currency Retrieves Strength as Bond Rates Rise
In a dynamic global economic landscape, the value of major currencies and precious metals is being shaped by a variety of factors. Here's a breakdown of how the Federal Reserve's interest rate outlook, the U.S. trade deficit, and global economic growth are impacting the dollar, EUR/USD, USD/JPY, and precious metals (gold and silver).
The Federal Reserve (Fed) and the U.S. Dollar
The Fed has maintained its interest rates unchanged, signalling a cautious, data-dependent stance with the possibility of rate cuts later in 2025 but not imminently. This hawkish stance supports a strong U.S. dollar due to expectations of steady or only gradual easing of rates.
The Euro, EUR/USD, and the European Central Bank (ECB)
The EUR/USD pair is under pressure due to concerns that U.S. tariff policies and trade tensions may dampen Eurozone economic growth. Although hopes for an end to the Russia-Ukraine conflict are somewhat supporting the euro, weak economic momentum and slower rate cuts expected from the ECB keep EUR/USD subdued.
The Yen, USD/JPY, and the Bank of Japan (BOJ)
The yen is weakening, with the USD/JPY pair rising, due to worries about U.S. tariffs negatively impacting the Japanese economy. The BOJ appears somewhat hawkish, considering possible rate hikes by the end of the year, but this has not been enough to strengthen the yen meaningfully amid risk to Japan’s growth and relatively higher U.S. Treasury yields.
Precious Metals and the U.S. Dollar
The resilient U.S. dollar is capping precious metal gains, with the euro and yen under pressure. Gold and silver, being non-yielding assets, become less attractive when the dollar strengthens and interest rates are stable or expected to remain higher.
However, precious metals prices also have safe-haven support on concerns that President Trump’s tariff policies will weigh on global economic growth prospects and geopolitical risks, including the conflicts in Ukraine and the Middle East. Today's stronger dollar and higher T-note yields are, however, limiting gains in precious metals.
Additional Factors
- The U.S. trade deficit, at a 1.75-year low, is providing some support to the dollar.
- Higher T-note yields are supporting the dollar.
- The dollar's rise today is due to some mild short covering after recent losses.
- The yen retreated from a 1.5-week high against the dollar today.
- Today's decline in the 10-year JGB Japanese government bond yield to a 4-week low of 1.465% has weakened the yen's interest rate differentials.
- Swaps are pricing in a 13% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.
- The Eurozone Jul S&P composite PMI was revised downward to 50.9.
- December gold today is up +3.80 (+0.11%).
- September silver is up +0.3527 (+0.94%).
In summary, the resilient U.S. dollar is capping precious metal gains, a softer euro relative to the dollar mainly due to slower ECB action and Eurozone uncertainties, and a softer yen pressured by both U.S. tariff and weaker domestic Japanese data.
Investing in technology sectors could be an attractive option for those seeking growth opportunities, given the U.S. dollar's strength and the dampened growth outlook for the Eurozone and Japan. Despite the resilient U.S. dollar capping precious metals gains, technological advancements might continue to drive increased demand for gold and silver as safe-haven assets in a dynamic global economic landscape.
Considering the Fed's hawkish stance, maintaining interest rates unchanged, and the possibility of rate cuts in 2025, technology companies with strong balance sheets and attractive growth prospects may prove to be sound investments in the quest for returns in the face of a stable or slowly adjusting dollar.
