The dollar index (DXY00) climbed to a seven-week high on Tuesday, finishing the session up 0.17%. The currency found support following hawkish comments from Federal Reserve officials who warned that inflation pressures could remain elevated, suggesting a preference for additional monetary tightening.
Boston Fed President Susan Collins stated she sees an "increased likelihood" of scenarios where inflation remains "notably above 2%". Richmond Fed President Tom Barkin added that it could take time for inflationary shocks to wane, noting a risk that elevated pressures could become entrenched. These remarks contributed to market pricing that reflects a 55% chance of a 25 basis point Fed rate hike at the next FOMC meeting on October 27-28.
Despite the hawkish tone, dollar gains were limited by a decline in WTI crude oil prices, which fell more than 1% to a three-week low. This drop eased inflation expectations and potentially persuaded the Fed to loosen monetary policy, acting as a bearish factor for the dollar. Additionally, the September Richmond Fed manufacturing survey fell to -6, reaching a seven-month low of -2, which was weaker than the expected 2.
The euro was pressured by the stronger dollar, with EUR/USD falling to a seven-week low and finishing down 0.18%. Lower European government bond yields also weighed on the currency after the 10-year German Bund yield fell to a 1.5-week low of 3.422%. Euro losses accelerated after the Eurozone September consumer confidence index fell more than expected, dropping -1.0 to -16.5 compared to expectations of -16.0.
However, euro losses were tempered by comments from ECB Chief Economist Philip Lane, who said a new wave of high energy prices means Eurozone inflation will stay elevated longer than initially anticipated. Markets are currently discounting a 48% chance of a 25 basis point ECB rate hike at the next policy meeting on October 29.
The yen turned lower after T-note yields recovered from early losses, with USD/JPY rising by 0.08%. The currency had initially moved higher when crude oil prices fell, a positive factor for Japan's economy given it imports more than 90% of its energy. Trading activity was below normal as markets in Japan were closed for a national holiday. Markets are pricing in an 18% chance of a 25 basis point BOJ rate hike at the next policy meeting on October 30.
Precious metals settled mixed on Tuesday. December COMEX gold (GCZ26) closed down -7.50 (-0.17%), while December COMEX silver (SIZ26) closed up +0.115 (+0.17%). The rally in the dollar index pressured metals, as did hawkish central bank comments from the Fed and ECB. Support for precious metals came from the drop in crude oil prices and recent fund inflows, with long holdings in gold ETFs climbing to a 6.5-month high on Monday and silver ETFs rising to a 5.75-month high on Tuesday.
Strong central bank demand continues to support gold prices. Bullion held in China's PBOC reserves rose by 650,000 ounces to 76.73 million troy ounces in August, marking the largest increase in three years and the twenty-second consecutive month of reserve boosts.