Dollar Declines Amid Trade Deficit and Lower Yields

The dollar index DXY declined by 0.32% on Tuesday, retreating from its 1.5-year high reached the previous day. The widening of the US August trade deficit to a 17-month high of -$105.6 billion contributed to the dollar's weakness, surpassing expectations of -$102.1 billion. This increase in the trade deficit is likely to impact the third-quarter GDP negatively.

Lower yields on T-notes and a rally in the S&P 500 and Nasdaq 100 to new all-time highs reduced demand for dollar liquidity. However, hawkish remarks from San Francisco Fed President Mary Daly provided some support for the dollar. Daly expressed concerns that AI spending, tariffs, and energy costs could sustain elevated inflation, necessitating further tightening by the Federal Reserve.

The yen weakened on Tuesday as safe-haven demand eased following a rally in the Nikkei Stock Index to a three-month high. A Reuters report suggesting that many within the Bank of Japan (BOJ) prefer to hold interest rates steady at this month’s policy meeting also weighed on the yen. However, hawkish comments from BOJ Governor Kazuo Ueda limited the yen’s losses. Ueda stated, "We intend to continue raising the policy interest rate and adjusting the degree of monetary accommodation in response to developments in economic activity, prices, and financial conditions."

Precious metals recovered from early losses and closed higher, benefiting from the dollar's weakness. December COMEX gold (GCZ26) rose by $30.30 (+0.73%), and December COMEX silver (SIZ26) increased by $0.289 (+0.47%). Support for precious metals also came from recent fund inflows, with long holdings in gold ETFs reaching a four-year high and silver ETFs a 6.25-month high. Additionally, strong central bank demand, particularly from China's PBOC, which increased its gold reserves by 650,000 ounces in August, further supported gold prices.