The dollar index (DXY00) fell by -0.06% on Tuesday. The dollar gave up an early advance on Tuesday and posted modest losses on weaker-than-expected US economic news, including July new home sales and Aug consumer confidence. Also, Tuesday’s -3% plunge in WTI crude oil to a 1-week low lowered inflation expectations, a dovish factor for Fed policy. In addition, safe-haven demand for the dollar was reduced on Tuesday after the New York Times reported the US State Department is preparing to send US diplomats back to embassies in the Middle East that were evacuated before and during the war with Iran, suggesting that the Trump administration does not anticipate a return to all-out hostilities with Iran.

The US June S&P Composite-20 Home Price Index rose +2.1% y/y, stronger than expectations of +1.8% y/y and the largest year-over-year increase in a year.

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US July new home sales fell -10.5% m/m to a 6-month low of 607,000, weaker than expectations of 620,000.

The US July Richmond Fed manufacturing survey of current conditions unexpectedly fell -1 to 4, weaker than expectations of an increase to 7.

The Conference Board US Aug consumer confidence index fell -0.8 to a 7-month low of 89.4, weaker than expectations of 90.2.

Hawkish comments on Tuesday from Boston Fed President Susan Collins were dollar-supportive when she said, "Maintaining the current federal funds rate target range will require continued evidence that inflation is indeed coming down, and should evidence of sustained inflation progress not materialize, I believe it will be appropriate to tighten policy soon."

The markets are discounting a 40% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) rose by +0.10% on Tuesday. The euro moved higher on Tuesday amid weakness in the dollar. Better-than-expected Eurozone economic news also boosted the euro on Tuesday after German Q2 GDP was revised upward and the Aug IFO business climate survey rose more than expected to a 1-year high. In addition, Tuesday’s -3% plunge in crude oil prices to a 1-week low supports the Eurozone economy and the euro, as Europe imports most of its energy.

German Q2 GDP was revised upward to +0.3% q/q and +1.0% y/y from the previously reported +0.2% q/q and +0.9% y/y.

The German Aug IFO business climate survey rose +2.1 to a 1-year high of 88.8, stronger than expectations of 87.2.

The markets are discounting a 95% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.08% on Tuesday. The yen was under pressure on Tuesday and 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%.

Losses in the yen were limited, as Tuesday’s -3% fall in crude oil prices to a 1-week low is positive for Japan’s economy and the yen, as Japan imports more than 90% of its energy. Also, lower T-note yields on Tuesday supported the yen.

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 80% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.

The Japan June leading index CI was revised upward by +0.1 to 116.5 from the previously reported 116.4.

October COMEX gold (GCV26) closed down -3.20 (-0.07%) on Tuesday, and September COMEX silver (SIU26) closed up +0.088 (+0.13%).

Precious metals settled mixed on Tuesday. Strength in stocks on Tuesday curbed safe-haven demand for precious metals. Also, a New York Times report on Tuesday said the US State Department is preparing to send US diplomats back to embassies in the Middle East, suggesting the US does not anticipate ramping up hostilities against Iran and easing geopolitical concerns and safe-haven demand for precious metals. In addition, hawkish comments from Boston Fed President Collins weighed on precious metals when she said it will be appropriate for the Fed to raise interest rates soon if evidence of sustained inflation progress does not materialize.

On the positive side for precious metals was Tuesday’s -3% plunge in crude oil prices, which lowers inflation expectations that could persuade the world’s central banks to loosen monetary policy, a bullish factor for precious metals. Also, Monday’s report from CNBC is bullish for precious metals, as the report said the Treasury could use the Treasury General Account to fund expanded buybacks of longer-dated US government bonds, bolstering concerns over dollar debasement and increasing demand for precious metals as a store of value.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 3.25-month high on Tuesday. 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.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.