A confluence of factors led to a decline in the Dollar Index, none of which may last for long. The dollar fell as the US treasury secretary Ms Yellen commented that the US inflation reading for August is likely to show a decline on weaker gas prices.
In addition, she stated that the President is reviewing tariffs on Chinese goods and some of the tariffs could be rolled back, which stoked risk-on sentiments further.
Market participants have been bidding up risk assets ahead of the US CPI data due on September 13 on hopes that inflation edging lower will make the US rethink its stance on monetary policy in the near-term.
The dollar was dealt another blow as Bank of Japan Governor Kuroda expressed concerns over the sharp depreciation of Yen, which strengthened the possibility of an intervention. Traders rolled back stretched short Yen position on his comments.
Investors were also looking forward to the European Union Ministers Energy Summit meeting in Brussels Friday wherein they discussed ways to address the energy crisis in Europe, though the meeting ended without any concrete decisions.
European Central Bank’s monetary policy decision Thursday, wherein the Bank raised all three major rates by 75 bps, is as such bearish for commodities and markets in general as the decision reaffirms the resolve of the global central bankers to rein in rampant inflation.
ECB’s assessments of the bloc’s economic outlook are also bearish for the commodities and the Euro as the Central Bank sees upside risk to the EU’s inflation and downside risk to EU’s growth, with inflation coming down to the Bank’s target only in 2024.
The Fed Chair Powell was clearly hawkish in his speech on September 8 as he essentially reiterated what he had already said in his Jackson Hole Symposium speech on August 26. The chance of a 75-bps hike in the FOMC meeting on September 21 meeting is quite high now.
The perception of the market about the Fed’s monetary policy is at odds with that of the Fed. The Federal Reserve has stated its goal clearly and loudly that one or two lower inflation numbers won’t make a trend.
The bank will need a series of low inflation data before it reduces the rate hike pace. It also appears that the market could be a bit too short, which has led to short covering ahead of the US CPI data due on September 13.
It is to be noted that despite rallying risk assets, the 10-year US yields inched higher to finish over 1% higher at 3.315%, which is close to its cyclical high.
The gold rally has faltered once again at $1730 level. The factors that led to a decline in the US Dollar Index are unlikely to be effective for long.
Traders will use rallies in gold to sell with $1675 level in focus on the downside. The upside is capped at around $1750.
(The author is AVP- Fundamental currencies and Commodities analyst, Sharekhan by )