US dollar weakened against gold and European currencies

The US dollar continued its downward trajectory on Tuesday, succumbing to pressure from rising risk appetite and mounting expectations of a Federal Reserve interest rate cut. The greenback closed lower against a basket of major currencies, including the euro and the pound, as investors flocked to riskier assets.

The Federal Reserve’s latest meeting minutes signaled a potential shift towards a more accommodative monetary policy. Fed officials hinted at a possible interest rate cut in September, citing recent economic data that showed inflation easing and the labor market softening. These expectations were reinforced by comments from Federal Reserve Chair Jerome Powell, who indicated that the central bank may need to adjust its policy stance.

Positive US economic data, particularly a surge in consumer confidence, further bolstered the case for a rate cut. The Conference Board’s consumer confidence index climbed to 103.3 in August, indicating a robust outlook for the US economy.

As a result of these factors, the US Dollar Index declined. The weaker dollar, in turn, supported the prices of gold and other commodities, as investors sought alternative assets.

What did FOMC Minutes say

FOMC Minutes, released on Wednesday, indicated a strong possibility of an interest rate cut in September. The minutes revealed that a significant majority of participants in the July 30-31 meeting anticipated that if incoming economic data aligned with their current forecasts, it would be appropriate for the central bank to adopt a more accommodative monetary policy stance at the upcoming meeting.

This aligns with market expectations of a rate cut in September, which would mark the first reduction since the Fed began raising rates in response to soaring US inflation during the pandemic.

While all participants voted to keep the federal funds rate unchanged at the July meeting, there was a clear inclination among members to begin cutting rates sooner rather than later. This sentiment was evident in discussions among several members of the Federal Open Market Committee.

In his speech at the Jackson Hole Symposium last Friday, Jerome Powell provided the strongest indication yet that the Federal Reserve will cut interest rates at its next meeting. Citing a significant decline in US inflation and a deterioration in labor market conditions, Powell stated, ‘The risk of high inflation has largely receded, even as the risk of a further weakening of the labor market has increased.’

In the clearest signal of a shift towards a more accommodative monetary policy, Powell added, ‘It is time to recalibrate monetary policy, and the path forward is clear.’ These comments pave the way for the Federal Reserve to implement its first interest rate cut after a prolonged period of rate hikes aimed at combating high inflation.

Mary Daly, a member of the Federal Open Market Committee and president of the Federal Reserve Bank of San Francisco, echoed Powell’s sentiment on Monday. She stated, ‘It’s hard to imagine anything that would derail a September rate cut.’ Daly further emphasized the need for a policy shift, arguing that ‘we don’t want to be in a position of having a tight monetary policy while the economy is slowing.’

While Daly avoided specifying the exact timing or magnitude of future rate cuts, she confirmed that ‘the direction of interest rates is down.

Gold Prices Soar Amid Geopolitical Tensions

Gold prices rallied on Tuesday, driven by the declining US dollar and heightened geopolitical tensions in the Middle East. The recent escalation between Israel and Hezbollah fueled safe-haven demand for the precious metal.

In addition to this, tensions in the Middle East are significantly contributing to growing fears of increased and widespread geopolitical tensions in the region. Gold has gained momentum from escalating tensions in the Middle East over the past weekend. The Israeli military announced on Sunday that its aircraft had preemptively struck thousands of Hezbollah rocket launch sites in southern Lebanon, citing intelligence indicating that the group was preparing to attack Israel.

Hezbollah subsequently confirmed that its forces had launched hundreds of rockets and drones at Israel in an “initial” response to the assassination of one of its senior commanders last month. The group claimed that its plan to target the Glilout base, located very close to Tel Aviv, had not been thwarted as Israel claimed. Sunday’s attacks between Hezbollah and Israel come amid a ten-month period of escalating tensions marked by almost daily cross-border fire, raising concerns of a full-scale war between the two sides.