The dollar index (DXY00) rose by +0.41% on Wednesday, just below Monday’s 1.5-year high. Higher T-note yields on Wednesday strengthened the dollar’s interest rate differentials as the 10-year T-note yield rose to a 24-year high of 5.36%. Also, hawkish minutes from the September 15-16 FOMC meeting supported the dollar.
The dollar fell back from its best level on Wednesday after US Aug consumer credit rose less than expected. The dollar also came under pressure after crude oil prices erased an early rally and fell sharply. The weaker crude prices eased inflation expectations and could prompt the Fed to tighten monetary policy, which supports the dollar.
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US MBA mortgage applications fell -4.2% in the week ended October 2, with the purchase mortgage sub-index down -2.1% and the refinancing mortgage sub-index down -7.5%. The average 30-year fixed-rate mortgage rose +19 bp to a 2.75-year high of 7.49% from 7.30% the prior week.
The minutes of the September 15-16 FOMC meeting were hawkish as all 19 officials supported the 25 bp rate hike, as “most participants assessed that another increase in the fed funds target range would likely be appropriate by year end.” Also, some officials said inflation risks had become more skewed to the upside, and many said that financial conditions still appeared supportive.
US Aug consumer credit rose +$8.281 billion, weaker than expectations of +$15.000 billion.
Markets are pricing in a 17% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.
EUR/USD (^EURUSD) fell by -0.55% on Wednesday and is just above Monday’s 16-month low. Dollar strength weighed on the euro Wednesday. The euro is also under pressure amid mounting fiscal and political risks in France, which faces a deepening bond crisis as sentiment has turned negative due to missed deficit targets, policy gridlock, and next year’s presidential elections that could radically alter the country’s direction.
The euro found some support on today’s economic news that showed German Aug industrial production rose +2.0% m/m, stronger than expectations of +0.5% m/m and the largest increase in 17 months.
The markets are discounting a 13% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.
USD/JPY (^USDJPY) fell by -0.05% on Wednesday. The yen recovered from a 1.5-week low against the dollar on Wednesday and posted modest gains. Short covering in the yen emerged on Wednesday after crude oil prices erased an early rally and fell sharply, which is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy. Better-than-expected Japanese economic news on Wednesday was supportive for the yen after the Aug leading index CI rose to a 12-year high, and Aug labor cash earnings rose more than expected, a hawkish factor for BOJ policy.
