The dollar index (DXY00) on Tuesday rose slightly by +0.08%, supported by reduced speculation about a 50 bp rate cut by the Fed.  The swap markets are discounting the chances for a 50 bp rate cut at next week’s FOMC meeting at 34%, down from 50% after the release of last Friday’s US payroll report.  The dollar was undercut by reduced liquidity demand with the strength in stocks.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 34% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) fell by -0.17% on Tuesday.  Bearish factors included strength in the dollar and expectations that the ECB will cut interest rates by 25 bp at Thursday’s policy meeting and express a dovish bias moving forward.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the September 12 meeting.

USD/JPY (^USDJPY) on Tuesday fell by -0.57%.  The yen rose on a report from Bloomberg that said BOJ officials see little need to raise interest rates at next week's policy meeting, as they are still monitoring lingering volatility in financial markets and the impact of the July hike.  The yen was undercut by Tuesday’s news that Japan’s Aug machine tool orders fell -3.5% y/y, the largest decline in four months. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +12% for the October 30-31 meeting.

December gold (GCZ24) on Tuesday closed +10.40 (+0.41%), and December silver (SIZ24) closed down -0.037 (-0.13%).  Precious metals on Tuesday closed mixed.  Expectations for the ECB to cut interest rates by -25 bp at Thursday’s policy meeting are bullish for precious metals.  Gold also saw support from a Bloomberg report saying that BOJ policymakers see little need to raise interest rates at next week’s BOJ meeting.

Precious metals prices were undercut by strength in the dollar and reduced safe-haven demand with strength in stocks.  In addition, a decline in inflation expectations has reduced demand for gold as an inflation hedge after the US 10-year breakeven inflation rate fell -2.1 bp to a 5-week closing low of 2.023%.  Silver was undercut by general pessimism about the outlook for the global economy, which was negative for industrial metals demand.

• Dollar Slightly Higher on Reduced Speculation About a -50 bp Rate Cut
• Dollar Rises on Speculation About Less Aggressive Fed Rate Cuts
• Dollar Firms as T-Note Yields Rise
• Stocks Move Higher on Strength in Chip Stocks and Positive Corporate News