Hawkish Fed Chair Warsh Boosts the Dollar and Sinks Gold

The dollar index (DXY00) rallied to a 2-week high on Friday and finished up by +0.61%.  The dollar jumped on Friday on hawkish comments from Fed Chair Warsh, who warned inflation isn’t meaningfully slowing and vowed that policymakers will return inflation to their 2% target.   The chance of a Fed rate hike at next month’s FOMC meeting rose to 57% from 36% before Warsh’s speech.  Friday’s unexpected upward revision in the University of Michigan US Aug consumer sentiment index also supported the dollar. 

Limiting gains in the dollar was the unexpected downward revision to US 2026 nonfarm payrolls, signaling the labor market was weaker than previously stated, a dovish factor for Fed policy.  Also, the unexpected contraction in the Aug MNI Chicago PMI is negative for the dollar.

Fed Chair Warsh said he’s impressed by the economy, which appears to have strengthened, and said inflation data don’t suggest the trend has meaningfully improved.  He added that policymakers must be confident inflation will return to their 2% target; otherwise, the Fed has “work to do.”

The US Aug MNI Chicago PMI unexpectedly fell -10.5 to 47.1, weaker than expectations of an increase to 57.9 and the steepest pace of contraction in 8 months.

The University of Michigan US Aug consumer sentiment index was revised upward by +0.7 to 51.7, stronger than expectations of no change at 51.0.

The University of Michigan US Aug 1-year inflation expectations were unexpectedly revised downward to 4.0% from 4.3% versus expectations of an upward revision to 4.4%.  The Aug 5-10 year inflation expectations were kept unrevised at 3.3%, right on expectations.

The annual benchmark revisions to 2026 US nonfarm payrolls showed an unexpected decline of -79,000 jobs, indicating a weaker labor market than expectations of a +183,000 increase.

The markets are discounting a 57% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell to a 1-week low on Friday and finished down by -0.62%.  The euro tumbled on Friday after the dollar rallied on a hawkish tone in Fed Chair Warsh’s speech.  The euro also has some negative carryover from Wednesday’s report from Bloomberg that said Russia is preparing to escalate attacks on Ukraine after concluding that negotiations for a peace deal have reached a dead end.  A supportive factor for the euro was Friday’s report on Eurozone Aug economic confidence, which rose more than expected to a 7-month high. 

The Eurozone Aug economic confidence index rose +1.3 to a 7-month high of 98.4, stronger than expectations of 97.5.

The markets are discounting a 94% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.44% on Friday.  The yen dropped to a 4-week low against the dollar on Friday after hawkish commentary from Fed Chair Warsh pushed the dollar and T-note yields higher.  The yen also continues to suffer from weak interest rate differentials, with the BOJ’s current policy rate of 1.00%, well below the Fed’s federal funds rate target range of 3.50%-3.75%.

The yen found some support on Friday’s economic news that showed Japan’s July jobless rate unexpectedly declined, a sign of strength in the labor market.  Also, the Aug Tokyo CPI rose as expected, a sign of inflation pressures that are hawkish for BOJ policy. 

The yen has underlying support from increased expectations of a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen.  Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. The markets are discounting an 84% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 

The Japan July jobless rate unexpectedly fell -0.1 to 2.4%, showing a stronger labor market than expectations of no change at 2.5%.

The Japan Aug Tokyo CPI rose to +1.9% y/y from +1.8% y/y in July, right on expectations.  The Aug Tokyo CPI ex-fresh food and energy rose to +2.0% y/y from +1.8% y/y in July, in line with expectations.

October COMEX gold (GCV26) closed down -133.10 (-2.88%) on Friday, and September COMEX silver (SIU26) closed down -2.436 (-3.51%).

Precious metals plunged to 1-week lows on Friday and settled sharply lower after hawkish comments from Fed Chair Warsh pushed the dollar index to a 2-week high.  Mr. Warsh’s comments boosted the chance of a Fed rate hike at next month’s FOMC meeting to 57% from 36% before he spoke, slamming precious metals prices.  Also, higher global bond yields on Friday were bearish for metals prices. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-month high today.  Long holdings in silver ETFs also rose to a 4.75-month high on Tuesday.

Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China’s PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first consecutive month the PBOC boosted its gold reserves.

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