US dollar edges lower as stocks reclaim ground

The dollar index (DXY00) on Monday fell -0.04%. The dollar also gave up an early advance and fell slightly after stocks recovered from overnight losses and moved higher, which curbed liquidity demand for the dollar.

Earlier on Monday, the American currency initially rose moderately after the 10-year T-note yield climbed to an 11-year high, which strengthened the dollar’s interest rate differentials.

Monday’s U.S. economic news was bearish for the dollar after the Sep NAHB housing market index fell -3 to a 2-1/4 year low of 46, weaker than expectations of 47.

EUR/USD rose by +0.09%. The Euro recovered from early losses and moved higher as energy crisis concerns eased when European natural gas prices fell to a 1-3/4 month. Hawkish comments from ECB Vice President Guindos and Bundesbank President Nagel supported EUR/USD when they both expressed support for additional ECB rate hikes.

The Euro initially moved lower on economic concerns after the Bundesbank said that “there are increasing signs of a recession of the German economy.”

ECB Vice President Guindos said, “the economic slowdown in the Eurozone will not reduce inflation by itself. Monetary policy needs to contribute to ease inflation.”


ECB Governing Council member and Bundesbank President Nagel said, “we are far away from interest rates that are at a level that is appropriate given the state of inflation. We’re still a good way off” from the neutral rate.

In its monthly report Monday, the Bundesbank said, “there are increasing signs of a recession of the German economy in the sense of a clear, broad-based and longer-lasting decline in economic output.” The Bundesbank also said it sees a “noticeable” contraction in the winter months and that headline inflation could even enter a double-digit range. Eurozone July construction output rose +0.3% m/m, the first increase in 5 months.

The USD/JPY pair rose by +0.29%. Higher T-note yields Monday weighed on the yen after the 10-year T-note yield climbed to an 11-year high. However, losses in the yen were limited by some short covering ahead of Thursday’s BOJ meeting results. Trading activity in the yen was subdued Monday, with Japan closed for a holiday.