The dollar index (DXY00) Monday fell by -0.33% and posted a 1-week low.  Strength in the yen undercut the dollar after the yen on Monday rose to a 13-1/2 month high against the dollar.  The dollar was also undercut by heightened speculation that the Fed might cut the fed funds target range by 50 bp at this week’s FOMC meeting.  Swap markets show that the odds of a 50 bp rate cut rose to 64% from 52% last Friday. A supportive factor for the dollar was Monday’s US Sep Empire manufacturing survey, which showed that general business conditions rose more than expected to a 2-1/3 year high. 

The US Sep Empire manufacturing survey general business conditions index rose +16.2 to a 2-1/3 year high of 11.5, stronger than expectations of -4.0.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 64% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Monday rose by +0.40% and posted a 1-week high. A weaker dollar on Monday boosted the euro.  Also, hawkish comments Monday from ECB Governing Council member Kazaks supported the euro when he said, "There's still more risk inflation will be higher over the medium term than we expect."

ECB Governing Council member Kazaks said, "There's still more risk inflation will be higher over the medium term than we expect," and the ECB "will almost surely need to wait until December for a clearer picture before making its next move" on interest rates.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 32% for the October 17 meeting and at 100% for that 25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Monday fell by -0.04%.  The yen on Monday rallied to a 13-1/2 month high against the dollar.  The yen has support from central bank divergence as the Fed is expected to begin cutting interest rates this week while the BOJ is expected to keep raising rates. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +15% for the October 30-31 meeting.

December gold (GCZ24) Monday closed down -1.80 (-0.07%), and December silver (SIZ24) closed up +0.061 (+0.20%).  Precious metals Monday settled mixed, with silver posting a 2-month high.  Monday’s decline in the dollar index to a 1-week low supported metals prices. Also, heightened speculation the Fed will cut interest rates by 50 bp at the Tue/Wed FOMC meeting boosted demand for precious metals as a store of value as the swap markets boosted the chance for a 50 bp rate cut this week to 64% from 52% last Friday.  In addition, fund buying of gold supported gold prices as long gold positions in ETFs rose to a 7-month high last Friday.

Gold prices fell back from a contract high Monday after news that the US Sep Empire manufacturing survey general business conditions index rose more than expected to a 2-1/3 year high, a hawkish factor for Fed policy.  Silver prices were also undercut after China Aug industrial production rose less than expected, a bearish factor for industrial metals demand.

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• Dollar Falls on Lower Bond Yields and Yen Strength