The U.S. dollar edged higher on Tuesday, with the dollar index rising to just under Monday’s 1.5-week high as a jump in Treasury yields and a sharp rally in crude oil pushed investors toward expectations of tighter central-bank policy. The gain in the dollar weighed on major currency pairs and contributed to lower precious metals prices.
Key takeaways
- Dollar firmer: The dollar index rose about 0.14% on Tuesday, staying just below Monday’s 1.5-week high.
- Inflation and rates catalyst: A roughly 4% surge in West Texas Intermediate crude lifted inflation expectations, while the U.S. 10-year Treasury yield climbed to a 19-year high near 5.04%.
- Fed pricing supported the move: Markets priced a near-certain 25 basis point Fed rate hike at the Tue/Wed FOMC meeting.
- FX and metals reacted: The euro and yen weakened versus the dollar, while December gold and silver fell as higher yields and a stronger dollar reduced demand for non-yielding assets.
What drove the dollar higher
Tuesday’s dollar support came from two main rate-linked forces. First, oil prices surged, with WTI rising about 4%—a move that tends to feed into inflation expectations and can reinforce hawkish expectations for the Federal Reserve. Second, yields moved higher across the curve: the U.S. 10-year Treasury yield increased to a 19-year high around 5.04%, strengthening the dollar through wider interest rate differentials.
Investor expectations around the upcoming Federal Open Market Committee meeting also remained a key driver. Markets were pricing a 96% probability of a 25 basis point rate hike at the Tue/Wed FOMC decision. The dollar also received additional support from the expectation that policy tightening could persist, while the yen and euro felt pressure as the interest-rate gap favored the United States.
That said, the dollar’s strength did not run unchecked. According to the U.S. data cited in the report, the September Empire manufacturing survey of general business conditions fell 13.0 points to 7.6, missing expectations for 15.0. The weaker print pulled the dollar away from its best levels on Tuesday.
Market reaction in major currency pairs
Euro: EUR/USD fell about 0.06% on Tuesday and held just above Monday’s one-month low. The euro weakened primarily alongside broad dollar strength, and the oil rally added another headwind. The report pointed out that higher imported energy costs can weigh on Eurozone growth given the region’s dependence on imported oil. That backdrop was partially offset by German data: expectations in the September ZEW survey for economic growth rose to a seven-month high of 34.7, up 0.5, though it still fell short of expectations for 40.0. The report also noted that the German 10-year Bund yield rose to a 17-year high near 3.57%, which would normally be supportive for the euro by narrowing the relative yield disadvantage versus the U.S. market.
Yen: USD/JPY rose about 0.48% on Tuesday as the yen slid to a one-week low against the dollar. The report said yen pressure was driven by a combination of higher U.S. Treasury yields and concerns about Japan’s financing outlook. It referenced a report that the Japanese government is considering a new defense spending target of 3.5% of GDP, which could increase government debt issuance and is viewed as bearish for the yen.
Oil also worked against the yen, given Japan imports more than 90% of its energy, according to the report. The currency’s losses were moderated by economic and rate developments in Japan: the July tertiary industry index rose 0.4% month over month, above expectations of 0.3%. In addition, the 10-year Japanese government bond yield jumped to a 30-year high near 3.04%, strengthening Japan’s relative rate position.
The report further cited carryover support from commentary involving Japan’s Government Pension Investment Fund (GPIF), which manages assets of about $2.1 trillion. It said a Japanese health minister overseeing GPIF noted the fund was still considering whether to review its asset allocation—fueling speculation that the GPIF could increase its holdings of Japanese government bonds, which would be yen-positive.
Looking ahead, support for the yen also reflected expectations for policy tightening by the Bank of Japan. The report said markets priced a 100% probability of a 25 basis point rate hike at Friday’s meeting. It also pointed to potential support from a coordinated U.S.-Japan intervention and the possibility of further action if the yen remains weak.
Why gold and silver declined
Precious metals prices settled lower on Tuesday. December COMEX gold declined 0.44% (down 19.10), and December COMEX silver fell about 0.44% (down 0.282). The report attributed the decline largely to dollar strength and rising bond yields, both of which tend to reduce the appeal of non-yielding assets.
The yield picture was broad: the 10-year Treasury yield rose to a 19-year high, the 10-year Bund yield reached a 17-year high, and the 10-year Japanese JGB yield climbed to a 30-year high. Higher yields increase the opportunity cost of holding gold and silver, while a stronger dollar can make metals priced in the U.S. currency less attractive to buyers using other currencies.
Oil’s rally added another constraint through inflation expectations, which can encourage additional rate hikes by major central banks. The report also noted market expectations for the Fed to raise rates by 25 basis points at the Tue/Wed FOMC meeting and for the Bank of Japan to hike by 25 basis points at Friday’s policy meeting, both weighing on precious metals.
Silver’s losses were described as more contained than gold’s, supported by signs of demand resilience in industrial metals. The report pointed to China’s August industrial production rising 5.2% year over year, above expectations for 4.8%.
Despite Tuesday’s drop, the report highlighted ongoing ETF flows that have been supportive for metals. It said long holdings in gold exchange-traded funds rose to a 6.25-month high, and long silver ETF holdings increased to a 5.5-month high on August 25. It also cited strong central-bank buying, referencing news that bullion held in China’s PBOC reserves increased by 650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month of increases.
Bigger picture and what to watch next
With the dollar reacting to a mix of higher U.S. yields and oil-driven inflation expectations, investors are likely to focus next on confirmation of the Fed’s near-term path and how global growth data weighs against the inflation impulse from energy. Key upcoming catalysts include the Tue/Wed FOMC decision, Friday’s Bank of Japan meeting, and additional releases on manufacturing and growth conditions that could shift rate expectations and alter currency and metals pricing.
