US Dollar Plunges Due to Poor Showing in Jobless Data
In a significant development, Swiss banking giant UBS has weighed in on the relationship between Federal Reserve (Fed) and European Central Bank (EZB) interest rates and their impact on the gold and silver market. The bank identified macroeconomic risks in the US, the independence of the Fed, fiscal sustainability, and geopolitical tensions as key drivers for central bank gold purchases.
The US economic landscape showed signs of slowing this week. The August payroll report revealed a weaker-than-expected rise of 22,000 jobs, falling short of the consensus of 75,000. Swaps are pricing in a 1% chance of a -25 basis point (bp) rate cut by the ECB at their September 11 policy meeting. This increased expectation for Fed easing through year-end has led to a decline in the 10-year T-note yield by 8 bp, eroding the dollar's interest rate differentials.
The unemployment rate rose by 0.1 point to a 3.75-year high of 4.3%, and the August average hourly earnings report eased to +3.7% year-on-year (y/y) from +3.9% in July. These indicators suggest a slowing economy, which may have contributed to the underperformance of silver compared to gold.
Silver holdings in ETFs rose to a 3-year high on Wednesday, and gold holdings in ETFs followed suit, reaching a 2-year high on Tuesday. Precious metal prices rallied on today's sharp sell-off in the dollar index and increased bets for Fed easing through year-end. Gold prices have continued to find support from uncertainty tied to US tariffs and geopolitical risks.
Political uncertainty in France is driving demand for gold as a safe-haven asset, following French Prime Minister Bayrou's call for a confidence vote that could bring down his government as soon as next week. The euro is seeing support as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates three times by the end of this year.
The dollar index (DXY00) is lower today by 0.75% due to weak US unemployment report and increased expectations for Fed easing through year-end. The dollar also weakened against the yen on Tuesday, following news that the Secretary General of Japan's Liberal Democratic Party, Hiroshi Moriyama, is stepping down, which is seen as paving the way toward a more expansionary fiscal policy. As a result, USD/JPY (^USDJPY) is down -0.92%.
In contrast, EUR/USD is up by 0.72% on dollar weakness. December silver (SIZ25) is up +0.073 (+0.18%), and December gold (GCZ25) is up +31.3 (+0.87%).
The global economic landscape remains uncertain, with various factors influencing the gold and silver markets. The ongoing trade disputes, geopolitical tensions, and expectations for central bank actions continue to shape the precious metals market. Investors will closely watch these developments as they navigate the market in the coming months.
