Dollar Erases Early Gains as T-note Yields Fall

The dollar index (DXY00) on Wednesday rose by +0.02%.  The dollar moved slightly higher on Wednesday due to weakness in the euro after EUR/USD fell to a 3-week low.  However, the dollar gave up most of its advance as T-note yields tumbled, with the 10-year T-note yield falling to a 1.5-week low, which weakened the dollar’s interest rate differentials.

Gains in the dollar were also limited due to concern over the Fed’s independence and fears about capital flight with President Trump’s move to fire Fed Governor Lisa Cook.  If Mr. Trump succeeds in firing Fed Governor Cook, foreign investors may lose faith in the Fed and the dollar and swap their dollar assets into non-dollar investments.

New York Fed President Williams said the US economy is slowing, not stalling, and he is optimistic about the state of the economy. He added that every FOMC meeting is “live” for interest rates and that at some point, it will be appropriate for us to adjust rates downward as we remain in a “modestly restrictive” stance on policy.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 86% at the September 16-17 FOMC meeting and at 53% for a second -25 bp rate cut at the following meeting on October 28-29.

EUR/USD (^EURUSD) on Wednesday fell by -0.10% and posted a 3-week low.  The euro came under pressure on Wednesday after the German Sep GfK consumer confidence survey unexpectedly fell to a 5-month low.  Also, political turmoil in France is bearish for the euro, following French Prime Minister Bayrou’s call for a confidence vote that could bring down his government as soon as next month.

On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, as the US tries to broker a peace deal between the two countries.  On Sunday, Russian Foreign Minister Lavrov said there was no meeting planned between the leaders of Russia and Ukraine and that there “needs to be an agenda first” before a meeting can take place.  “This agenda is not ready at all.” The outcome could have macroeconomic implications regarding tariffs and oil prices, and could, of course, have significant consequences for European security.